(Toronto) Interest rates have been on a merry-go-round in recent years, having reached extremely low levels during the pandemic and then rising quickly to their highest level in a generation. But the roller coaster ride is full of thrills for homeowners with mortgages, and a growing number are struggling to adjust to the changing landscape.
With interest rates increasingly expected to remain high for longer, many homeowners who got low rates years ago are possibly bracing themselves for financial hardship down the road. approaching the renewal of their mortgage loan.
“With each passing month, approximately 2% of mortgage holders face renewal at significantly higher interest rates,” wrote Royce Mendes, managing director and head of macroeconomic strategy at Desjardins, in a memo to to its customers on September 19.
Fixed-rate borrowers are expected to see their payments increase by an average of 14% to 25% next year compared to costs at the start of 2022, according to the Bank of Canada. In 2025 and 2026, payments are expected to increase by 20% to 25%.
Those on full variable rates have already shouldered the burden of higher rates, seeing the average increase in their payments reach 49% this year.
Borrowers with variable rates but fixed monthly payments will face the biggest increases in the future, as some have seen their payments gradually cover only the interest costs – or even less. People benefiting from these products will face an expected average increase of 44% in their payments by 2026, as their mortgages come up for renewal.
Peter Routledge, the head of Canada’s banking regulator, warned in September that this category of borrowers, which total about $369 billion of the $2.1 trillion mortgage market outstanding, “risked experiencing a significant payment shock », adding that he would like this option to be offered less often.
Faced with the sharp increase in payments, banks and other lenders have reacted in particular by extending amortization periods to reduce monthly payments.
More than 46% of Canadian mortgages had payment schedules of more than 25 years in the second quarter, according to the Bank of Canada, a proportion that has been steadily increasing from around 32% in the summer of 2020.
Many mortgage amortizations at Canada’s largest banks now extend over 30 years, from 24% of mortgages at the Royal Bank to 30% for those at the Bank of Montreal, with the vast majority exceeding 35 years. Mortgages at CIBC and TD fell somewhere in between, while Scotiabank stood out in having only 1% of its mortgages extend for more than 30 years.
The banking regulator also raised concerns about these extended mortgage terms, which are slowing how quickly people build equity in their homes. Lenders, in turn, have also sought to reduce long-term mortgages, with most reporting last quarter that they had reduced their total 30-year-plus mortgages by a percentage point or two.
As extended amortizations lose popularity, borrowers may be required to pay a lump sum or increase their monthly payments to get their loans back on track, which the regulator suggests is the preferred option.
Finding the funds could prove difficult for many, however, as cracks begin to appear in credit markets.
“Your auto loans, your credit cards, your lines of credit and the delinquencies on these products are increasing,” said Seamus Benwell, housing research specialist at Canada Mortgage and Housing Corporation (CMHC).
Borrowers who can’t handle higher payments or don’t have the cash flow for a lump sum will need to consider all their options, said Meaghan Hastings, managing director of brokerage The Mortgage. Coach.
She said she has heard from customers who are surprised to learn how much interest rates have climbed, especially since they must pass the mortgage stress test if they want to change lenders.
The test is pushing more borrowers into the alternative loan market, she noted.
“They have great credit, they have great income. But it is this qualification that pushes them towards the alternative space. »
Although alternative products generally cost more, there are a growing number of options in this sector, Hastings said.
“Sometimes there are solutions that will just get them through the next 18 to 24 months, you know, in the most difficult areas or in the most difficult times. »
Hastings added that she expects some real estate investors to dump some condominiums due to financial difficulties, but that overall most owners will do what it takes to hold on to their property, whether It’s about selling their car, taking a job or any other situation they can envisage.
“Canadians in general will do everything in their power to keep their homes. We love being owners. »
