Mortgage holders across the country are facing a growing crisis following a rate hike on Wednesday that saw the key interest rate jump to five per cent — a steep rise from the 0.25 per cent overnight rate Canada had a year and a half ago. Some fixed-rate mortgage holders are now seeing their monthly payments almost double at renewal time, while variable-rate holders have watched in horror as payments steadily crept up to thousands more per month. Others, who have variable-rate mortgages with fixed payments, have seen their debt stretch into “forever mortgages,” with amortizations of 60, 70 or even 90 years. Mortgage interest costs soared by almost 30 per cent, according to May’s consumer price index, which could worsen over the next few years if interest rates remain elevated.In Toronto, where homeowners have some of the largest mortgages in Canada, it’s been a painful time, with no end in sight.The Bank of Canada’s quarter-point rate hike — its 10th increase since March 2022 — will be particularly hard on homeowners with variable-rate mortgages, whose payments are tied to the prime rate, as well as fixed-rate mortgagors renewing in the next year or two. “In Canada, most people are on a five-year mortgage term or less, meaning the entire market is moving toward higher rates,” said James Laird, co-CEO of mortgage brokerage Ratehub.ca and president of CanWise, a mortgage lender. “People need to calculate what their new mortgage rates could be in order to prepare.”According to Ratehub.ca’s mortgage payment calculator, in January 2022, a homeowner who put a 20 per cent down payment on a $1,245,700 home with a five-year variable rate of 1.4 per cent amortized over 25 years would have had a monthly mortgage payment of $3,937.After the Bank of Canada’s recent rate hike, that homeowner’s variable mortgage rate will increase to 6.15 per cent, and their monthly payment will be $6,465 — this means the total impact for the homeowner, as of July 2023, is a difference of $2,528 more per month, or $30,336 per year, on their mortgage payments. It’s important to note, said Laird, that homeowners with a variable-rate mortgage, where the monthly payments fluctuate based on the Bank of Canada’s prime rate, are feeling the payment increases in real time — meaning they pay more each time the bank raises its key rate. However, homeowners with fixed-payment variable-rate mortgages — where the payments adjust automatically to rising interest rates while the amount the homeowner pays monthly remains the same — will have their amortizations automatically lengthened but must return to their contractual amortization agreement upon renewal, he said. This means they confront substantially higher mortgage payments when they renew, Laird added, similar to homeowners on fixed-rate mortgages. Leah Zlatkin, a LowestRates.ca expert and mortgage broker, said anyone holding a variable-rate mortgage who is concerned about making their payments should reach out to their lender and seek help. “This hike will make mortgage payments challenging for many Canadians,” said Zlatkin. “Those with a static-payment variable mortgage should be mindful of what their amortization length has grown to and consider what this means come renewal time. “Homeowners with a renewal on the horizon need to give themselves as much lead time as possible and seek advice from a mortgage professional to review potential options prior to renewing.”Homeowners can expect rates to be elevated for some time, experts say. Inflation peaked at 8.1 per cent in June 2022, but has since dropped to 3.4 per cent. The Bank of Canada now expects inflation won’t come down to its target of two per cent until the middle of 2025, six months later than it had previously forecast. Further interest rate hikes haven’t been ruled out.Phil Soper, CEO of Royal LePage, believes the Bank of Canada will pause rate hikes for the time being to see the financial fallout. “But if they engaged in a longer period of increases, it could have a larger psychological impact on consumers,” he said, “because the bank would be injecting further uncertainty into the market, and that has a direct impact on housing.”With files from Josh RubinClarrie Feinstein is a Toronto-based business reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca
Mortgage holders across the country are facing a growing crisis following a rate hike on Wednesday that saw the key interest rate jump to five per cent — a steep rise from the 0.25 per cent overnight rate Canada had a year and a half ago.
Some fixed-rate mortgage holders are now seeing their monthly payments almost double at renewal time, while variable-rate holders have watched in horror as payments steadily crept up to thousands more per month. Others, who have variable-rate mortgages with fixed payments, have seen their debt stretch into “forever mortgages,” with amortizations of 60, 70 or even 90 years.
Mortgage interest costs soared by almost 30 per cent, according to May’s consumer price index, which could worsen over the next few years if interest rates remain elevated.
In Toronto, where homeowners have some of the largest mortgages in Canada, it’s been a painful time, with no end in sight.
The Bank of Canada’s quarter-point rate hike — its 10th increase since March 2022 — will be particularly hard on homeowners with variable-rate mortgages, whose payments are tied to the prime rate, as well as fixed-rate mortgagors renewing in the next year or two.
“In Canada, most people are on a five-year mortgage term or less, meaning the entire market is moving toward higher rates,” said James Laird, co-CEO of mortgage brokerage Ratehub.ca and president of CanWise, a mortgage lender. “People need to calculate what their new mortgage rates could be in order to prepare.”
According to Ratehub.ca’s mortgage payment calculator, in January 2022, a homeowner who put a 20 per cent down payment on a $1,245,700 home with a five-year variable rate of 1.4 per cent amortized over 25 years would have had a monthly mortgage payment of $3,937.
After the Bank of Canada’s recent rate hike, that homeowner’s variable mortgage rate will increase to 6.15 per cent, and their monthly payment will be $6,465 — this means the total impact for the homeowner, as of July 2023, is a difference of $2,528 more per month, or $30,336 per year, on their mortgage payments.
It’s important to note, said Laird, that homeowners with a variable-rate mortgage, where the monthly payments fluctuate based on the Bank of Canada’s prime rate, are feeling the payment increases in real time — meaning they pay more each time the bank raises its key rate.
However, homeowners with fixed-payment variable-rate mortgages — where the payments adjust automatically to rising interest rates while the amount the homeowner pays monthly remains the same — will have their amortizations automatically lengthened but must return to their contractual amortization agreement upon renewal, he said.
This means they confront substantially higher mortgage payments when they renew, Laird added, similar to homeowners on fixed-rate mortgages.
Leah Zlatkin, a LowestRates.ca expert and mortgage broker, said anyone holding a variable-rate mortgage who is concerned about making their payments should reach out to their lender and seek help.
“This hike will make mortgage payments challenging for many Canadians,” said Zlatkin. “Those with a static-payment variable mortgage should be mindful of what their amortization length has grown to and consider what this means come renewal time.
“Homeowners with a renewal on the horizon need to give themselves as much lead time as possible and seek advice from a mortgage professional to review potential options prior to renewing.”
Homeowners can expect rates to be elevated for some time, experts say.
Inflation peaked at 8.1 per cent in June 2022, but has since dropped to 3.4 per cent. The Bank of Canada now expects inflation won’t come down to its target of two per cent until the middle of 2025, six months later than it had previously forecast. Further interest rate hikes haven’t been ruled out.
Phil Soper, CEO of Royal LePage, believes the Bank of Canada will pause rate hikes for the time being to see the financial fallout.
“But if they engaged in a longer period of increases, it could have a larger psychological impact on consumers,” he said, “because the bank would be injecting further uncertainty into the market, and that has a direct impact on housing.”
With files from Josh Rubin
Clarrie Feinstein is a Toronto-based business reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca
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