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Many Canadians will face a jump in mortgage payments at renewal. We spoke to experts about how to manage the financial squeeze.
With most mortgages facing renewal by 2026, a lot of Canadian home owners are staring down steep increases in their mortgage payments. At a time when household finances are already stretched thin, many could see their mortgage payments go up 20% to 40%. But, “in many cases, the news isn’t as bad as people think,” says David Larock, a mortgage broker with Integrated Mortgage Planners in Toronto. Instead, he says, there are a number of strategies that can be employed to manage mortgage payments. The key is to talk to a mortgage expert to ensure every avenue is explored—and not to panic.
The impact of higher rates depends on the type of mortgage borrowers have. “Fixed-rate mortgage holders aren’t affected until their fixed rate comes up for renewal,” says Larock. Many Canadians were fortunate to lock in a fixed rate in the 1% to 2% range during the interest rate lows of 2020 and 2021. However, many fixed-rate borrowers will have to renew at current rates, which range between 4.1% and 4.6%.
Borrowers with a variable-rate mortgage whose interest rate fluctuates—also known as a floating rate mortgage—have already shouldered the pain of higher rates. Their mortgage payments have increased with every change in the Bank of Canada’s benchmark interest rate, which guides lenders’ prime rate.
But 75% of Canadians have variable-rate mortgages with fixed payments. When interest rates increase, a larger portion of each mortgage payment goes toward paying interest on the loan, and a smaller portion goes toward the mortgage principal. At a certain point, the mortgage payment no longer covers the interest portion of the loan. The rate at which this happens is known as a trigger rate. By the first half of 2023, nearly 80% of households with variable rates and fixed payments hit their trigger rate.
Often, borrowers who reach their trigger rate must increase their payment to cover the interest on their mortgage. However, some lenders allow for negative amortizations, meaning the mortgage payments are allowed to stay the same, but the mortgage amount starts increasing—instead of decreasing. In this scenario, home owners can be forced to return to their original amortization at the time of renewal—and catch up through larger payments—unless they opt to refinance their mortgage.
Here is the current state of interest rates on mortgages in Canada right now.
If you’re worried about what your mortgage payments will be at the time of renewal, many mortgage experts suggest preparing early and exploring all your options. Here are some of the actions you can take.
Eric Warden, a financial planner at Warden Financial with IPC Investment Corp. in Peterborough, Ont., is a big fan of cutting back on your lifestyle costs, whether that’s cancelling gym memberships, taking fewer vacations, or trading in your car less frequently. Each one of these cuts in your budget can save you hundreds to thousands of dollars a year.
You can pay off other loans during a refinancing, suggests Larock. By consolidating loan payments—such as credit card debt or a car loan—into the mortgage payment, you can increase the amortization but reduce the monthly loan payments.
If you have a frank conversation about your finances and provide evidence of financial hardship, your mortgage lender may work out an alternative payment plan, says Larock. “The worst thing you can do is go radio-silent, if you can’t make payments,” he says. “Lenders are trying to work with borrowers, and you might be surprised at the flexibility they are willing to offer.”
Larock says this even applies to variable-rate mortgage holders who have hit their trigger rate and would typically be expected to increase their payments.
Extending the amortization is a popular option these days, with 25-plus year mortgages becoming the norm. In 2023, RBC reported that 43% of its residential mortgages had amortization periods of more than 25 years. And, as first announced in the 2024 federal budget, the government has extended the amortization period for insured mortgages for newly built homes to 30 years.
Larock says that even if a borrower has less than 20% equity in the property, they might be able to qualify and refinance for a 30-year mortgage, provided the home is new and valued at less than $1-million.
This slows the pace at which the mortgage will be paid off, but lowers payments.
However, this strategy should only be used as a last resort, says Warden. “All this means is you’re paying a lot more interest due to the extended period,” he says. Plus, this could mean you still have a mortgage in retirement, when your income is lower or non-existent.
Instead of shopping for a new rate at renewal, you may want to stick with your current lender. If you have been diligently paying off your mortgage “you can renew with that lender without requalifying—even if you wouldn’t be able to requalify based on today’s rates,” Larock says.
And, with the current economic uncertainty, the conservative move is to renew at a fixed mortgage rate, he says, although the most recent interest rate cut means variable rates, which are higher, will fall. “We don’t know what the future holds—and fixed rates are lower now,” he says.
If your mortgage allows prepayments, consider putting any additional income you earn in the future towards the mortgage. “You can throw money at the mortgage using mortgage prepayment allowances and shorten the amortization,” says Larock. “A lot of lenders offer a 20% annual prepayment allowance, and if you max that out over five years, you could pay the whole thing off in five years.”
Consider non-traditional sources of funds to pay off your mortgage sooner. For instance, Warden recently helped an elderly couple to pay off part of their mortgage via a retroactive WSIB settlement. “Their mortgage is about half of what it was 24 months ago,” he says. “Now they can see potentially retiring.”
Warden also suggests looking at the performance of your investments, such as those in your tax-free savings account. If the rate of return on your investments is less than the interest rate on your mortgage, paying off the debt first can net you a better return. “Take that money out and pay down the mortgage,” he says.
In most cases, following these tips, working with a mortgage expert and communicating with a lender can lead to a payment plan that’s manageable. If for some reason you can’t make your mortgage payments and are forced to sell your home, sell earlier rather than later, says Larock. “If the home is in foreclosure, you’ve lost control of the process,” he says. “Don’t wait until the decision is made for you.”
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