Mortgage renewal payments to be higher going forward even as rates get cut
A pause in the Bank of Canada’s monetary tightening campaign may bring relief to many mortgage owners, experts told BNNBloomberg.ca while noting that other indebted Canadians will continue to feel the weight of higher borrowing costs.
On Wednesday, the Bank of Canada held its policy rate at a 22-year high of five per cent. Canada’s central bank has raised interest rates by 475 basis points since March 2022.
Alana Riley, the head of mortgage, insurance and banking at IG Wealth Management, said prime rates are expected to remain at 7.2 per cent following the central bank’s decision.
Since the Bank of Canada has raised rates 10 times since March 2022, she said “the market impact of these changes in aggregate become material,” and will weigh on many borrowers even with the rate hold.
“This rate is burdensome to household cash flow for Canadians with variable rate mortgages, HELOCs and unsecured lines of credit,” Riley said in a written statement.
James Laird, co-chief executive officer of Ratehub.ca and president of CanWise Mortgage Lender, said fixed rates will remain at current levels due to the decision to hold interest rates, and that will be good news for some mortgage owners.
“Anyone with a variable-rate mortgage or balance on a home equity line of credit (HELOC) will be pleased that their rate has not gone up further,” Laird said. “Anyone that requires a mortgage in the fall - fixed or variable - will also be pleased with this rate hold.”
Leah Zlatkin, a mortgage broker and expert with LowestRates.ca, said in a Wednesday interview with BNNBloomberg.ca that the rate hold may “come as a great relief” to many variable-rate mortgage owners.
In the current environment, she said she recommends three-year fixed products to many clients, depending on their needs.
Zlatkin said individuals may struggle with renewals if they have a fixed-rate mortgage from around five years ago. Those people coming up for renewal will have challenges requalifying at either a new lender or their existing lender because rates are “much higher” than when they initially qualified, she said.
STRAIN ON BUDGETS
According to Riley, cumulative interest rate increases have translated to higher monthly payments for individuals with variable-rate mortgages that move with prime rates.
Due to previous increases in prime rates, more of each monthly payment is being allocated toward interest and less toward principal, she explained.
“This puts a strain on household budgets, leaving less room for discretionary spending or saving,” she said.
While some variable-rate mortgage products have static payments, Riley said others offer floating payments that move in accordance with prime rates. She said those with floating payments have felt immediate impacts in accordance with each rate hike.
“Some individuals and families may find it difficult to keep up with the increased financial obligations, potentially leading to financial stress and potential default risks,” she said.
“This strain on affordability can deter prospective homebuyers from entering the market, leading to a slowdown in real estate activity.”
Riley noted that variable-rate mortgage owners with static payments who purchased between March 2020 and March 2022 are currently being impacted by higher interest rates on a cash flow basis.
That may put those customers into negative amortization, which “can happen when you have a variable interest rate mortgage with a fixed payment,” she said.
“If the interest rates increase significantly, customers may need to pay more to cover interest and principal on their payments. The interest will build up, and your principal will go up instead of decreasing.”
Zlatkin noted that the housing market has seen a recent increase in inventory and slight declines in home prices – conditions that could be ripe for certain buyers to think about purchasing a home.
“The challenge for many people is that they're worried about interest rates, and they're afraid to go out and buy,” she said.
“But if you're going to be a bullish buyer, right now's a great time, because you have all the negotiating power. Sellers have excess inventory and there's not enough buyers out there.”
Zena Amundsen, a certified financial planner and owner at Astra Financial Services, said Wednesday that higher borrowing costs are impacting people across all income levels as they navigate economic uncertainty.
“When we're doing cash flow budgeting and forecasting, let's just assume it’s higher rates going forward,” she said in an interview.
“I think it's preparing for the worst and hope for the best and really just that awareness of how important it is to control the things that we can control within our cash flow.”