September 5, 2024
Mortgages interest rates have increased rapidly. Here’s our advice for handling the cost of mortgage rate increases when renewing your mortgage.
An increasing number of homeowners are feeling the burden of unaffordable mortgage payments due to high interest rates. Even though interest rates have been cut this year, they’re still much higher than when many last agreed to a new mortgage deal.
An estimated 2.2 million Canadians will be renewing their mortgage in 2024 or 2025. It’s likely that many will not be able to afford the new rates and will have to make tough decisions about their living situation. If you find yourself unable to meet these increased mortgage payments, what steps should you take?
We asked Jennifer McCracken, a BDO Licensed Insolvency Trustee, what these rising interest rates mean for homeowners and who she thinks will be the most affected.
“Lots of people have scrimped and saved just to get on the housing ladder in recent years. Houses have been expensive that whole time, but mortgage rates have been super low for over a decade. I think people who did everything they could when rates were low to get a house are those most at risk, because they were likely counting on having a lower mortgage rate to help them afford their house in the long-term.”
While the Bank of Canada cut its key interest rate on June 5 by 0,25%, 70% of Canadians say it had no impact on their financial outlook, according to a joint survey between CPA Canada and BDO Debt Solutions.
That same survey also found that 48% say interest rate increases in 2022 and 2023 negatively affected their debt load.
The Bank of Canada further decreased its rate on July 24, and on September 4, bringing it to 4.25%
Interest rates have increased for several reasons. The COVID-19 pandemic led the federal government to implement unprecedented fiscal policies, such as CERB and CEBA, to support individuals and businesses. Additionally, post-pandemic supply chain disruptions and the war in Ukraine drove up energy prices.
These and other factors contributed to a significant rise in inflation. In response, the Bank of Canada began raising interest rates in March 2022, hoping to make borrowing more expensive, reduce consumer spending, and, in turn, lower inflation.
Yes, though the progress has been gradual. As of June 2024, inflation in Canada was just under 3%.
The Bank of Canada predicts that inflation will drop below 2.5% in the latter half of 2024. As for interest rates, they have also begun to fall as we’ve previously mentioned.
“The first thing I would do if I was worried about my mortgage is talk to my lender,” says Jennifer McCracken.
“I would contact the bank and get a sense of mortgage penalties; those will likely vary because it depends a lot on where you live. Discuss making interest only payments. If it’s a variable rate, see if you could do a short-term refinance until renewal. If you want to sell and pull out your equity and downsize you can discuss the possibility of porting your mortgage to a new property.”
Sometimes if you simply ask your lender to lower their offer they will.
“People are scared to negotiate with their lenders and simply believe the offer they get is a ‘take it or leave it’ option. That’s not the case though. They want your business and will likely do what they can to accommodate you,” Jennifer says.
When your mortgage is up you don’t need to re-sign with the same lender. It’s more convenient to do so, and that’s what most lenders count on.
Shopping around means you can compare prices and find the best deal possible. It’s a good idea to get a head start on looking too, usually a few months before your mortgage is up for renewal. Doing so will allow you to see what’s out there early. If you do find something better, you can use it as a negotiating piece with your current lender to see if they’ll lower their rate.
If they won’t lower their offer, you can then sign with the new lender at a better rate without having to scramble.
Shopping around for your mortgage insurance is also something you could look into. A mortgage broker could also help you during the shopping process.
Traditional mortgage insurance offered by your financial institution pays off the remaining balance of your mortgage, up to a certain amount.
You can however choose to a life insurance instead of mortgage insurance. Life insurance can be used to help protect your mortgage and give an added layer of protection to your loved ones as well. If you die and are covered by life insurance, your beneficiaries will get a tax-free death benefit. They can then choose what to do with that money.
If you die while covered by traditional mortgage insurance the money goes to your lender.
It’s important to consult a financial professional to understand which option is right for your situation, but shopping around could make a difference in your budget.
This one may be the riskiest option, but some believe it is a good idea right now. Most Canadian fixed term mortgages are five-year terms, but you can get one-to-three-year fixed term mortgages as well.
Many believe that interest rates have hit their peak and will now fall in coming years. If you have a short-term mortgage in that case, you can take advantage of lower rates in a few years.
The risk here is if interest rates rise again you’ll be forced to negotiate at an even higher price than now.
We know most people who buy homes don’t want to sell. Sometimes though it’s unavoidable. The idea of renting can work for some people whose mortgage has become unaffordable but it depends on where you live and what you do for a living, Jennifer McCracken says.
“If you live in Toronto, Vancouver, Montreal or any other large city in the country it’s probably not an option because rent would be the same as a mortgage payment but there are areas of the country, usually less populated ones, where the cost difference between rent and a mortgage is a pretty big gap. That can add up to big savings.”
“I wouldn’t suggest it to everyone in a rural area. I know people like farmers livelihoods depends on them living in the house next to their crop field. You need the exact right circumstances for this.”
If renting isn’t an option maybe downsizing is. Moving to a smaller home can reduce your mortgage costs and save you money.
Some lenders will even allow you to port (this essentially means ‘transfer’) your mortgage to a new property without a penalty.
Others will come with a penalty fee. Be sure to talk to your lender to see how downsizing will affect you and your mortgage before taking any action.
Debt consolidation can be a valuable tool for homeowners facing an unaffordable mortgage interest rate. Debt consolidation involves combining multiple debts into a single payment, typically with a low interest rate.
By consolidating high-interest debts into a single, manageable loan, you can streamline your financial obligations and potentially reduce your overall monthly payments.
You can free up additional money that can then be put towards making mortgage payments as a result.
This approach won’t work for everyone, and it is best to consult professional advice before going ahead with it. A Licensed Insolvency Trustee can assess your situation and tell you if debt consolidation can work for you.
The amortization period in a mortgage refers to the length of time it takes to fully repay the mortgage loan. By extending it, you can spread out your mortgage payments over a longer period, resulting in lower monthly payments. This can help alleviate immediate financial strain and make the mortgage more affordable on a month-to-month basis.
The Financial Consumer Agency of Canada points out that if you have a $300,000 mortgage and a 4% interest rate with an amortization period of 10 years, your monthly payment will be $3,000. Extending the amortization period to 25 years reduces the monthly payment to approximately $1,500, nearly halving it.
Although the Federal Governement recently extended the amortization periiod to 30 years for new home owners, 25 years is the maximum length you can extend your amortization period for to have it insured by the Canada Mortgage and Housing Corporation. There is however a downside to this. The longer you take to pay off your mortgage, the more you’ll pay in interest. This can mean spending thousands or even tens of thousands of dollars more in the long run. It’s best to consult professional advice before taking this step so you understand how it will affect your situation.
If you get a new rate and realize it’s just a tiny bit beyond what you feel comfortable with, the first thing you have to do is cut spending, McCracken says.
“Maybe that means eating only home cooked meals, changing the grocery store you shop at for a cheaper one, cutting a subscription you have, driving less to save on gas, changing your phone or internet provider or a combination of these.”
If you’re able to add work on a part-time or gig work basis it can make a big difference as well. We know this won’t be something everyone can do though.
For those that can, it can make a big difference to help afford any increase in the cost of a mortgage.
What if you don’t want to sell/downsize, can’t afford your mortgage rate increase and getting a new source of income either won’t be enough or isn’t possible?
A consumer proposal is a tool that helps people lower their unsecured debt, a house is a secured asset though. So, would filing a consumer proposal even be of any use?
The answer is yes. Here’s how.
While a consumer proposal can’t directly help you lower your mortgage payments, it can make paying your mortgage easier. Consumer proposals can reduce your unsecured debts by up to 80%.
There of lots of examples of unsecured debt a consumer proposal can help lower. If you have debt from credit cards, lines of credit, student loans, a personal loan, or any combination of these, they can all be reduced with a consumer proposal.
“The benefit is it lowers your unsecured debt payments, freeing up more money for your mortgage,” Jennifer McCracken points out.
A consumer proposal is also interest free. So, while you can’t file a consumer proposal directly to lower your mortgage payments, filing one to reduce your other debts can make finding the money for a mortgage much easier.
Another advantage to a consumer proposal is unlike bankruptcy, you don’t lose any assets.
A consumer proposal is done when a Licensed Insolvency Trustee negotiates with your creditors on your behalf to reduce your debt. Only a Licensed Insolvency Trustee is legally allowed to file a consumer proposal for you in Canada.
The first step is to have a Licensed Insolvency Trustee evaluate your financial situation. They will deem if a proposal can help you and then begin the process of negotiating with your creditors to reduce your debt.
The first meeting to evaluate your financial standing often takes less than an hour. The first consultation with one of BDO’s Licensed Insolvency Trustees is completely free too.
If you’ve been offered a rate hike you can’t afford and don’t want to sell, talk to one of our Trustees and see if a consumer proposal is right for you.
September 5, 2024
Mortgages interest rates have increased rapidly. Here’s our advice for handling the cost of mortgage rate increases when renewing your mortgage.
