As we make our way through 2024 with no interest rate cuts yet to be had from the Bank of Canada (BoC), another wave of homeowners are facing mortgage renewals at much higher rates.
With five-year terms being the most popular mortgage choice, the majority of borrowers renewing this year will leave behind the rates set by their lender in 2019 when the BoC policy rate was 1.75% and be met with rates set based on the current — and much higher — 5% policy rate.
Today, the going interest rate for five-year mortgages fluctuates depending on what type of mortgage is selected, and which lender it's with, but tend to range anywhere from roughly 4.8% to 7%. For homeowners, this can mean hundreds of more dollars paid in interest each month — something no one is looking forward to.
With that possibility hanging over borrowers' heads, renewing a mortgage can be a daunting task. We spoke with Clay Jarvis, a mortgage and real estate expert at NerdWallet, to discuss what Canadians can do to prepare for a mortgage renewal in 2024.
Expect Your Payments To Go Up
There's no way around it — mortgage payments are going to increase for borrowers renewing this year, and as Jarvis puts it, "it's looking like it's going to be pretty steep." For a person whose interest rate increases from 3.5% (a typical bank rate in 2019) to 5.5% upon renewal, they can expect their monthly payments to jump by more than 20%, Jarvis says.
"If the mortgage balance is closer to the national average, which last year was about $343,000, you might pay $300 more a month, but if your mortgage balance is $500,000, you're probably looking at $600 more a month," Jarvis said. "So I'd say the people that are going to be in the most trouble are the people who are renewing their mortgages for the first time who bought in 2019 when prices were really high."
Older homeowners who are on their second, third, or fourth renewal with a lower balance (and likely a lower purchase price) aren't going to be in quite as sticky of a situation.
Research, Shop Around, and Negotiate
The first thing any borrower should do ahead of a renewal is contact their lender and try to negotiate. "Lenders typically aren't that keen to negotiate on renewals, because they know that renewing with your current lender is the path of least resistance so they don't really feel like you need to cut a deal," Jarvis warns, however. So if negotiation doesn't result in a lower rate (and even if it does) the next step it to consider other lenders.
For borrowers looking for the best possible deal, typically smaller lenders (ie. not the big banks) are more flexible with their rates.
"I suggest calling a mortgage broker and asking them what other lenders are offering for renewal rates," Jarvis said. "I think the renewal market is going to be very competitive in the next couple of years — you never know what kind of deals might be out there. And if you're not comfortable rate shopping yourself, that's what mortgage brokers are there to do."
He also notes that mortgage brokers typically have good relationships with lenders, and are going to be able to negotiate more easily than most borrower would be able to on their own.
Reconsider Re-Amortizing
Extending your amortization period at renewal might seem like a great way to get lower monthly payments, but Jarvis says it's an option that should be used with caution and careful consideration as there are three big risks that come with it.
The first is that because you're extending the life of your loan by several years, you'll end up paying significantly more in total interest amounts.
"Let’s assume you have 15 years left on a mortgage worth $350,000. If you opt for a five-year fixed term at a renewal rate of 5.5%, your monthly mortgage payment would be $2,848. If you extended your amortization to 20 years, your monthly payment would be $2,395," Jarvis explained in a recent NerdWallet report.
"You’d save almost $500 per month, but you’d also pay $254,889 in interest by the time your loan is paid off. With a 15-year amortization, your total interest cost would be $162,693 — over $92,000 less."
The second risk is that having to pay off a mortgage for a longer period of time can eat into other financial plans, like retirement. "If you're 50 years old, and you push out your amortization an extra 10 years, now all of a sudden you're paying for your mortgage in retirement and that might not have been something you planned on doing 20 years ago," Jarvis explains.
Lastly, if you extend your amortization this go around and then reduce it the next time you renew — which is what's often recommended to borrowers — your payments are going to jump up high. "You'll really just be putting off the payment shock that you're trying to avoid now for a few years, but it'll still be there waiting for you," Jarvis said.
Don't Pick A Mortgage Term Assuming Rate Cuts Will Happen
Variable rates are on the rise again now that predictions of rate cuts from the Bank of Canada are swirling around, but Jarvis notes that going with variable is still a gamble. "We do not know when they're going to come down," he says. "Also, variables can still be significantly higher than fixed rates right now, so qualifying for a variable-rate mortgage will be tougher."
Many lenders are offering fixed rates around 5% at the moment, which Jarvis notes, 'historically, isn't bad' and comes with no risk of your rate increasing.
"Really, it comes down to how much risk a person is comfortable with and how large a mortgage each rate type allows them to borrow," he says.
Be Proactive
"I think the one thing for people to know is if your renewal's coming up, don't wait. Be proactive," Jarvis said.
Borrowers should start looking as soon as they can to find what mortgage term (and what lender) will suit their needs best. "You don't want to be coming up to the 11th hour and all of a sudden all of your options have withered away on you," Jarvis says. "So do it quick, and it'll allow you to get more information and make a better decision."
