A real estate sign posted outside a home in Pointe-Claire, a city in Montreal's West Island, on May 7, 2024.Christinne Muschi/The Canadian Press
No matter how you slice it, many renewing mortgage borrowers will face higher monthly payments this year.
The situation may not be as dire as it was in late 2023 – when interest rates topped 5 per cent – but today’s borrowing costs are still considerably higher than in 2020, when many of today’s mortgage holders first took out their five-year terms.
To illustrate, today’s lowest five-year fixed option is 3.84 per cent – 245 basis points higher than the 1.39 per cent available in December, 2020.
The cracks are starting to show. According to Equifax Canada’s fourth-quarter consumer credit trends data, around a million borrowers in the country will experience higher monthly payments in 2025 owing to “elevated interest rates compared to prepandemic and pandemic levels, when they last locked in their low rates.”
These borrowers may face “significantly higher payments” despite recent rate reductions,” states Equifax’s release. “A quarter of mortgage-holders saw their monthly mortgage payment increase by over $150 at renewal in Q4 2024.”
The pain is being felt most acutely in Ontario, where sky-high home prices mean larger mortgage balances. More than 11,000 mortgage holders in the province missed a payment in the fourth quarter of 2024, triple the number in the same quarter in 2022.
Rising interest rates aren’t the only challenge facing borrowers at renewal time. As The Globe and Mail’s personal finance columnist Rob Carrick recently wrote, home values have also declined from their peaks at the height of the pandemic, leaving some borrowers in the position of owing more on their mortgage than their property is actually worth.
So, what can borrowers do to minimize higher payments at renewal time? One option is to extend their amortization. Bumping your payment timeline back up to 25 or 30 years spreads your mortgage payments over a longer time period, effectively lowering the amount you’ll pay each month.
Let’s say a borrower purchased a $500,000 home in 2020, at that rock-bottom rate of 1.39 per cent. They made a 5-per-cent down payment and amortized their mortgage over 25 years. Using Ratehub.ca’s mortgage payment calculator, their monthly payments come out to $1,949.
Fast forward to today, and our borrower has a remaining mortgage balance of $408,391. They renew into another five-year fixed term, this time with the current lowest rate of 3.84 per cent, and a remaining amortization of 20 years. Even with an overall smaller mortgage balance, this higher rate causes their monthly payment to balloon to $2,434 – a difference of $485. That’s no small chunk of change, and a tough pill for many households to swallow.
Now, let’s say our borrower opts to re-extend their amortization back up to 25 years at this time. All other aspects remaining the same, the monthly payment is now $2,113 – a much more manageable monthly increase of $164.
Of course, the main caveat here is that a longer mortgage equals more interest paid over time.
In the 20-year scenario, the borrower would have paid $70,989 in interest by the end of this new five-year term and whittled their principal balance down by $75,051. Comparably, in the 25-year scenario, they’ll shell out $72,909 in interest payments and only reduce their principal by $53,868.
This may fly in the face of the advice to pay down your mortgage as fast as possible, to pay less interest and come out in the strongest financial position – but many of today’s borrowers don’t realistically have that luxury.
Refinancing is another option, but it’s not a cure-all for payment woes. First, only mortgage holders with at least 20-per-cent equity generally have this option – and as Mr. Carrick points out, shrinking property values won’t position borrowers favourably at the qualification stage.
Rather, pulling money out of the mortgage can make sense if it’s to address a big-picture cash-flow problem, for example, a high credit-card payment or auto loan. If refinancing reworks the financial scenario to have a larger mortgage payment but lower overall debt obligations, our borrower comes out in better shape.
Lastly – and this is key – do not sign the renewal slip sent by your existing lender. Once you do, you’ll be immediately locked into your new, higher rate, along with those heftier payments.
As I wrote in my previous column, renewal time is a key opportunity to shop around for a better deal, with the intention of switching lenders, or negotiating with your existing one. This is the way to secure the best options, and shave off a few basis points, which can also help ease the shock of a larger monthly payment.
Penelope Graham is the director of content at Ratehub.ca.
