More than a million homeowners will have to renew their mortgages this year, with many of them from early in the pandemic when interest rates hit historic lows.
For people who bought homes in 2021, the good times may be coming to an end.
“Five years ago, when people were signing mortgages, they were signing rates somewhere between 1.5 to 3 per cent,” said real estate broker LJ Aguinaga. “That was kind of the range that we were getting. Depending at what point in the year they were signing and how far along to COVID we were. Right now, when we’re renewing, a lot of people are going to be signing around that 4-4.09 per cent rate.”
Aguinaga says that those buyers will now be facing an around 20 per cent increase on their monthly payments. For an average mortgage of about $550,000, that would amount to an extra $550 per month.
“That’s going to be about $6,500-$6,600 a year, effectively,” he said. “So families are definitely going to feel a pinch. It’s definitely a significant increase in their cost of living that compared to what they were used to.”
He does not expect to see a wave of people selling properties they can no longer afford, however.
“Everybody qualified for these mortgages, even with the new rates, because when they originally took on these mortgages five years ago, they were all stress tested at 5.25 per cent,” said Aguinaga. “I suspect Canadians are going to have to tighten their belts and adjust what they’re spending on realistically to cope with this differential, because the cost of renting isn’t significantly cheaper right now.”
Portfolio manager Michael Zagari suspects that cost-cutting will come at the expense of savings.
“It’s not the best thing to do, obviously, but it would probably be the easiest adjustment to make,” he said.
Zagari says that some may be tempted to extend their mortgages to 25 or 40 years to keep payments lower. However, that decision will cost homeowners much more in interest over the long term.
“What does that mean in total dollars, that you’re signing up for before you actually do it? You might be shocked to see that you’ll end up paying an extra 10, 15, $20,000 could be even higher than that, depending on your mortgage,” he said.
Homeowners may also be shocked by just how much more of their payment will be going towards covering interest and how much slower it chips away at the principal.
