If your mortgage is up for renewal in the coming months, you may be beginning to panic at the prospect of paying more to finance your home as the Bank of Canada continues its interest rate hiking cycle.
The Bank of Canada hiked its overnight rate by half of a percentage point Wednesday, bringing it to 3.75 per cent.
Experts say its now time to take a step back and really take stock of your household situation, but don't be afraid to shop around to ensure you get the lowest mortgage rate at renewal.
"What you do will depend on how tight your finances are, how close you are to finishing paying off your mortgage, how quickly you can plan on paying it down, and what your outlook is for the economy and rates generally," said James Laird co-CEO of Ratehub.ca and president of mortgage brokerage CanWise Financial.
Laird said those up for mortgage renewal might be influenced to just stay with their existing lender to avoid having to go through the mortgage stress test process again with a new lender.
"The problem with this is it means people are less likely to shop around and get themselves the best rate. People should not be deterred from shopping around. Many people will still pass. If you could pass a stress test five years ago, you can pass it now, probably," he said.
The mortgage stress test was first introduced in 2016 and new rules came into effect last year.
Most mortgage holders in Canada have a mortgage term of five years or less, whether its a fixed-rate or variable-rate mortgage. And while borrowers with a fixed-rate mortgage have generally benefitted from some stability amid rising interest rates compared to their variable-rate mortgage counterparts who have felt the immediate impact of hikes, those with fixed-rate mortgages will see their monthly mortgage payments jump significantly as they gear up to renew.
Homeowners will likely see an increase of approximately 18 per cent in monthly payments at renewal, according to Ratesdotca, even if they have paid down a significant portion of the mortgage and may have a higher income.
Laurie Campbell, director of client financial wellness at Bromwich + Smith, said renewing your mortgage before your renewal date comes around may be beneficial in order to lock in a lower rate, but there are risks.
Canada's major banks and other lenders have an early mortgage renewal option that allows you to renew before your term ends without any penalties, but switching lenders or renewing before your mortgage lender's renewal period may come with financial penalties.
"You have to weigh the penalty against the better rate that you might get. So that's the downside of early renewals," she said.
"You might go to get into an early renewal thinking that interest rates might continue to climb, but they don't and then you actually end up paying the penalty. So it is a bit of Russian roulette."
You might want to consider a shorter mortgage term, which is typically three years or less, with the caveat being you don't know whether interest rates are going to continue to increase or not, Campbell said.
"Let's say you pick a three-year term versus a five-year term and that three-year term comes up and suddenly you have to pay even more because the interest rates have increased in the last three years rather than waiting five," she said.
Samantha Brookes CEO of Mortgages of Canada has received a lot of calls in recent weeks from clients up for renewal soon and the top questions she asks them are: how much debt are they carrying, if they can renew now with the debt they are carrying and whether they can continue to carry the debt for the next couple of years.
"If you have the mortgage plus your debts or line of credit, or if you have a second mortgage and something's coming up for renewal and you can't afford everything right now, it may make sense to refinance now," she said.
When factoring in the possibility of a recession next year, Ratehub.ca's Laird said a variable-rate mortgage could be an option to consider upon renewal.
"When a recession occurs, the central bank could be influenced to stop raising rates and perhaps lower rates. So the sooner and more severe the recession, the lower we should expect rates to be. And only a variable rate would take advantage of rates going down next year or the year after that, whereas the fixed-rate mortgage will stay at what you lock it in at," he said.
Ultimately, there's not one solution for all households, Laird said.
This report by The Canadian Press was first published Oct.26, 2022.
