Interest rates have seen significant volatility in recent years, spurred by both the global pandemic and Canadian economic factors.
And when you combine this with Canada’s booming housing market, it’s fair to say that affording a mortgage now is markedly different than it was just two or three years ago.
So for those facing the daunting task of renegotiating their mortgage this year, here’s what you need to know.
The State of the Mortgage Market: How Did We Get Here?
Historically, fixed rate mortgages have been more popular in Canada than variable rate mortgages, but the extremely low interest rates seen during the pandemic (bottoming out at just 0.25% for the Bank of Canada’s overnight lending rate) spurred an increase in the number of people choosing cheaper variable rate mortgages.
50% of new and renewed mortgages in the second half of 2021 were variable, with many people choosing to renegotiate their mortgage early to gain access to low rates.
But a protracted increase in rates meant this popularity was short-lived; by mid 2023, the Bank of Canada’s overnight lending rate had reached 5%, and the share of new mortgages issued in August 2023 with a variable rate fell to 6%.
Right now, about 68% of three and five year mortgages currently held in Canada are fixed rate.
And nearly half of all Canadian residential mortgages are due for renewal in 2024 and 2025 – meaning a massive 2.2 million households will be seeing much higher interest rates hit their budgets within the next year.
Interest Rates in 2024
Experts predict that the extremes seen over the past few years are behind us, and that from this year onwards we should see a slow but steady decline in interest rates.
But still, compared to when mortgage deals due to expire in 2024 were signed, rates for both variable and fixed rate mortgages are significantly higher than they were.
So it’s fair to say that, keeping all else equal, renewing your mortgage this year will mean you end up paying much more.
But exactly how much more?
Well, that depends on the type, size, duration and rate type you go for with your mortgage. Here’s some basics:
- The current prime rate is 7.2%
- Bank of Canada calculations predict that the median increase in monthly mortgage payments for mortgages renewed in 2024 will be 34%
- Fixed rate mortgages currently average 5.51% for a five year term
- Variable rate mortgages currently average 6.80% for a five year term
Whether you opt for a variable or fixed rate moving forward, you will be paying more than you were previously.
But there are ways to lessen the interest rate shock, as we discuss below.
How to Get the Best Mortgage Deal
1. Start Early
Most lenders allow you to start the renewal process up to 120 days before your mortgage term expires, which means you have plenty of time to prepare yourself.
Starting early so you can shop around for the best product, do your research on rates and lenders, and understand interest rate forecasts will ensure you are in the best position to find the right mortgage product for you.
2. Consider Switching Lenders
Insured mortgages no longer need to be stress tested when they are renewed with a different lender (as long as the original mortgage amount and amortization remains the same).
This change in policy occurred in 2023, and means that those switching their insured mortgage are no longer subject to qualify at a rate that’s 2% above the rate offered by the new lender.
The upshot of this is that mortgage holders have more choice when they come to renew, and that lenders need to be more competitive in their rates, whether for new or renewed mortgages.
3. Consider Different Products
Recent years may have made you nervous of future interest rate volatility, but most experts predict that rates will start falling in 2024.
So if you’re reluctant to lock yourself into a rate now because you believe that better deals will be available in a year or two, then choosing a short term mortgage may give you the flexibility you need.
Both fixed and variable rates are higher for short term mortgages, but choosing a higher rate for the near term might save you more in the long run.
It’s also the case that if rates do start to fall, those with variable rate mortgages will see the benefit to their bottom line much more quickly than stuck those on a fixed rate.
4. Use a Broker
If the choice between fixed and variable rates, mortgage terms and lenders sounds confusing to you, or if you simply want to make sure you’re seeing the best deals, a mortgage broker can help.
Mortgage brokers have professional knowledge of the industry, and can help you find options that suit your needs and budget.
It costs nothing to use a broker, and can save you a significant amount of time and money.
5. Use Prepayment Privileges
If your current mortgage allows prepayment, either by lump sum or increasing monthly payments, then you might want to consider paying off as much as you can before your mortgage comes up for renewal.
This helps in two ways: firstly, your overall mortgage size will decrease when it is renewed, meaning you will pay less overall; and secondly, a higher equity-to-loan ratio may help you qualify for better rates when you start shopping around.
6. Extend Amortization
Lastly, extending your amortization period is an option if you need to lower your monthly mortgage payments.
This can be a risky strategy, as a longer amortization period means you end up paying more in interest over the life of the loan, but it can provide significant short term relief for those unable to keep up with the new cost of their mortgage.
Don’t let interest rate shock catch you by surprise; by fully researching your options before it comes time to renew, you can protect your budget and your home.
