Homeowners with upcoming mortgage renewals need to start preparing for the financial hit now

Homeowners in Toronto and Vancouver facing pending mortgage renewals could find themselves paying hundreds of dollars more a month and need to consider ways to prepare for the coming hit, from proactively hiking payments now to paying down other forms of debt to minimize their exposure to rising interest rates.

Data analysis from Ratehub.ca on those two cities shows that many people renewing fixed-rate mortgages under current interest rates could be paying as much as $1,000 more a month.

For example, someone who bought a home in the Greater Toronto Area at the average price of $790,000 in 2019, paid the minimum down payment and got the best possible rate (2.59 per cent) for a three-year mortgage would be paying $3,317 a month during that term. If they renewed for another three-year period today, their interest rate would nearly double to 5.14 per cent, for a payment of $4,209 – a 27 per cent increase.

Under the same conditions in Vancouver’s more expensive market, homeowners would be paying $1,020 more a month based on interest rate increases.

The picture is a bit better for people with expiring five-year mortgages renewing today under the same parameters, with the average buyer paying $676 more a month based on average GTA prices five years ago, and $562 more a month in Vancouver. Real estate agents have pointed out that many buyers were already stretching themselves to the limits just to be able to own property, and any additional strain could be consequential.

“People need to question where this extra thousand bucks a month will come from,” said Evan Parubets, an investor specialist and certified financial planner with Steadyhand Investment Funds, a Vancouver-based investment firm.

“Don’t wait till the mortgage comes due, because you don’t want to be in a position panicking and not know what to do.”

Mr. Parubets said many of his clients who have renewals coming up in the next year or two haven’t paid much attention to the looming financial hit and are instead preoccupied by the immediate impact that rising interest rates have had on their home equity and other lines of credit payments.

However, any homeowner with some time before renewal needs to plan for how they’ll manage a potential four-figure increase to their housing expenses amid a high-inflation market where financial pressure is coming from all directions.

Mr. Parubets advised people in this situation should either increase their payments now so they have time to adjust to a new lifestyle with less disposable income. He also said homeowners should consider aggressively attacking other forms of debt they have so they don’t have to deal with ballooning interest rates from multiple directions.

“Start preparing now, find out what your payment could be, and then look through your budget to see where you can cut discretionary spending,” Mr. Parubets said.

Financial planners such as Mr. Parubets believe the rapid change in interest rates could spell the end of the pandemic-era shift in savings, where Canadian households cumulatively amassed billions during a period of low spending during lockdowns. It’s not just homeowners facing pressure at this time – those who rent in cities such as Vancouver and Toronto are also dealing with inflated monthly payments.

Jason Heath, managing director of Objective Financial Partners, a fee-only financial planning firm in Markham, Ont., said people’s desire to save and invest will be hit by both the squeeze on housing costs and an unstable stock market environment.

A lot of people have seen their investments fall 10, 15 or 20 per cent this year depending on what they’re invested in, Mr. Heath said. Some see it as more reason to focus on debt repayment as opposed to investment, he added.

“You’ve got a lot more people saying ‘I kind of like the guaranteed return of paying of my 5 or 6 per cent interest rate debt,’ especially if they’re nervous about the stock market and further interest rate increases.”

Mr. Parubets says the people ultimately worst affected by this scenario are younger homeowners in their 20s and 30s. Those ages are when people carry some of their highest levels of debt, and will feel the brunt of rising interest rates more because of their relatively higher mortgage balances.

There are few courses of action for people carrying these large mortgages, but both advisers say it’s worth talking to a broker about whether an early renewal – locking in the current rate in a rising rate environment – on your mortgage term is worth it.

Mr. Heath says that while interest rate trends are hard to predict, the Bank of Canada will likely keep hiking as inflation remains stubbornly high. A recession, as expected by some in 2023, could change that, but only if inflation also drops.

“My crystal ball is no better than anyone else’s, but … we are in a new housing and debt environment,” he said. “Debt was sexy for a number of years, but now debt repayment is becoming sexy.”

Source: From The Globe and Mail by SALMAAN FAROOQUI