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.
Interest rates have fallen in the past year but many Canadians who recently renewed are facing higher mortgage costs. Interest rates remain an issue for many Canadians who will be renewing their mortgage in the coming months. In a time of economic uncertainty, due to factors such tariffs, it’s not impossible to think that rates will rise again.
Around 60% of existing mortgages are scheduled to be renewed in 2025 or 2026, and a considerable number of these borrowers, particularly those who secured very low fixed rates during the pandemic, will encounter increased payments, according to the Bank of Canada’s 2025 Financial Stability Report.
For many homeowners, a mortgage renewal or new mortgage agreement can bring unexpected financial strain. A payment that once fit comfortably into your monthly budget might now leave little room for other essentials, savings, or even peace of mind.
If you find yourself unable to meet these increased mortgage payments, what steps should you take? We spoke to BDO Licensed Insolvency Trustee Rebecca Sudano to find out her advice those struggling with a mortgage renewal.
Rebecca Sudano notes that just being able to buy a home is a challenge for many these days.
“Lots of people have scrimped and saved just to get on the housing ladder in recent years,” she says.
She points to a recent survey by BDO Debt Solutions and CPA Canada that found that saving for a down payment is the biggest obstacle preventing 32% of Canadians from entering the housing market.
Mortgages play a factor as well, with 30% of Canadians saying they can’t afford to make monthly mortgage payments.
The broader economic landscape isn't offering much relief either. A significant 43% of Canadians identify the high cost of living as their most pressing financial challenge, making it harder for many to afford either a mortgage or a down payment.
If your mortgage payment has started to stretch your budget thin, it might be time to take a closer look at your financial health. For many homeowners, the first warning signs of mortgage strain aren’t missed payments, it’s warning signs in other areas of your finances.
You might notice yourself relying more on credit to cover everyday expenses or putting off payments on other bills to prioritize your mortgage. Savings goals, like retirement contributions or emergency funds, may take a back seat. BDO and CPA Canada’s survey found that only 28% of Canadian homeowners say their top financial goal is to are save retirement or long-term investments. 25% of homeowners are looking to pay off their mortgage faster.
One other sign your mortgage is strangling your budget is if you find yourself cutting back on essentials to free up cash.
Maybe the financial stress is affecting your mental health and keeping you up at night as well.
These are all signs that your mortgage is taking a toll on your overall stability. If it’s getting harder to keep up or you’re constantly juggling payments, you don’t need to wait for things to get worse. Taking action early gives you more room to adjust and more options to protect your financial future.
There’s some things you should do right away if you realize you’re struggling to afford your mortgage.
“The first thing I would do if I was worried about my mortgage is talk to my lender,” says Rebecca Sudano.
“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,” Rebecca 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.
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, Rebecca Sudano 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 homeowners, 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, Rebecca 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,” Rebecca Sudano 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.
