Despite Canada’s low default rate, one-third of borrowers are concerned about increased monthly mortgage payments as pandemic-era renewal nears an end. Over the next year, the last of the five-year, fixed-payment mortgages obtained during that record-low interest rate period will come up for renewal, representing approximately 12 per cent of all outstanding mortgages in Canada.
According to a recent Royal LePage survey, conducted by Burson, 38 per cent of Canadians with a mortgage on their primary residence expect their monthly payment to increase upon renewal, with 26 per cent anticipating a slight increase and 12 per cent expecting a significant jump.
Nationwide, 31 per cent of respondents expect their mortgage payments to stay approximately the same, while 17 per cent expect their payment to decrease. Homeowners who last renewed their mortgage when interest rates were at historic lows are the most likely to expect an increase at their next renewal. The Bank of Canada’s overnight lending rate stood at just 0.25 per cent in 2021 before rising to 4.25 per cent by the end of 2022.
“The pandemic-triggered era of ultra-low rates came to an abrupt halt in early 2022, having lasted less than two years. While many Canadians who secured record-low mortgages during this period have already navigated their renewals, the final major group of rock-bottom rate holders are up for renewal, and understandably, they are concerned,” said Phil Soper, president and CEO, Royal LePage.
“What we are finding in practice is that families are managing the transition. Borrowing rates have retreated significantly from their post-pandemic peaks, while salaries and wages have continued to appreciate. While some households are adjusting discretionary spending to accommodate higher monthly mortgage payments, the widespread default crisis many feared simply hasn’t materialised – a testament in large part to Canada’s prudent lending standards.”
Respondents in Saskatchewan and Manitoba are the most likely to anticipate a higher monthly payment at renewal (43 per cent), while those in Alberta are the least likely (29 per cent). Across the rest of the country, responses are aligned, with 39 per cent of respondents in Ontario, Quebec and Atlantic Canada, and 37 per cent in British Columbia expecting an increase in their monthly payments.
Anxiety over renewal
When asked how they feel about their upcoming mortgage renewal compared to their previous renewal, 43 per cent of respondents say they feel about the same as last time; approximately one third (35 per cent) say they feel more anxious. Anxiety is highest among homeowners who last renewed their mortgage in 2021 or 2022.
“Anxiety is concentrated right where you would expect it, among homeowners who bought or refinanced when the overnight rate sat at 0.25 per cent,” said Soper. “Logically, no one expected rates to stay that low forever, but knowing a rate hike is coming intellectually and seeing the actual monthly dollar increase on paper are two very different things. Importantly, the vast majority of these 2021 borrowers were stress-tested at rates near five per cent or higher. They are moving into a rate environment they have already proven they can handle.”
Under federal mortgage qualification rules, borrowers must demonstrate they can afford payments at a rate higher than the one they are offered by their lender. Today, buyers must qualify at the greater of their contract rate plus two percentage points or 5.25 per cent. As a result, homeowners who purchased in 2021 were required to qualify at a minimum rate of 5.25 per cent, which is higher than most five-year fixed rates available today.
Forty-five per cent of respondents in Vancouver and 39 per cent in Toronto say they feel more anxious than they did at their previous renewal. Meanwhile, 34 per cent of respondents in Montreal and 32 per cent in Calgary report feeling more anxious about their upcoming renewal.
“Anxiety around mortgage renewals tends to be greater in British Columbia because outstanding mortgage balances are often much larger,” said Adil Dinani, sales representative and team lead of the Dinani Group, Royal LePage West Real Estate Services in Greater Vancouver. “The same increase in interest rates that adds a few hundred dollars to a monthly payment in other parts of the country can have a much greater impact in Metro Vancouver.”
Dinani noted that most homeowners want to stay in their homes rather than sell. “When payments put pressure on the household budget, many are exploring practical options, whether that is generating rental income, adjusting spending, or in some cases selling an investment property,” he said. “People are adapting to changing conditions rather than making rushed decisions.”
To offset higher housing costs, homeowners expect to make practical adjustments to their household budgets, with plans to reduce discretionary spending, cut back on travel, and delay or cancel home renovations.
Most homeowners have no plans to change their living arrangements despite the prospect of higher mortgage payments. Among the 22 per cent who are considering a change, seven per cent are looking at relocating to a more affordable region, while five per cent are considering renting out part of their home to offset mortgage costs. Another five per cent say they are considering downsizing.
