Fixed-rate mortgage? Here’s how much more you may have to pay when you renew — and what to do if you can’t afford it

By Jenna Moon Business Reporter

Toronto homeowner Barbara Edwards has been wondering when she’d see an interest rate hike.

Alongside her partner, Edwards purchased her home in 2019 amid a dip in mortgage rates. Since average rates had historically been much higher, and rates were at a record low, Edwards said she has long expected that they’d begin to rise again.

People with five-year fixed mortgages who purchased their home at lower interest rates will, sooner or later, be renegotiating their rates — and with the Bank of Canada hiking interest rates to cool inflation, many are about to see their monthly housing payments increase.

Edwards says she and her partner made sure to buy a home that was well within their budget so they could prepare for the eventual rate increase.

“We wanted to make sure that if one of us lost a job, or was too sick to work, we could still afford to pay for our home on one income,” she says. The pair opted for a 30-year mortgage because they knew they’d have extra expenses in the first year and planned to pay extra toward the principal loan down the road.

What is uncertain is exactly how much more per month homeowners like Edwards will be paying in the next few years.

James Laird, CEO of mortgage planning website Ratehub.ca, told the Star that people who are now renewing won’t see much change just yet. Those people “would likely still be renewing at a pretty low rate,” since you can hold previous interest rates for four months, he explains — so people renewing in June, for example, could still get a lower rate from February or March.

Homeowners will start to feel a pinch in the fall, Laird says, when people begin to move from a two or three per cent interest rate to four or five.

It’s impossible to predict where rates will be in two years’ time, he adds. At present, Ratehub’s best interest rate is 4.34 per cent — up almost exactly two per cent compared to 2019’s lows.

Laird walked the Star through some calculations to give homeowners a look at the new rates they could be paying. The calculations assume a home was purchased in 2019 on a five-year fixed mortgage, with a renewal pending in about two years’ time. They also assume an average purchase price and interest rate from that year.

A homeowner who purchased a home at a five-year fixed rate in 2019 would have an interest rate of roughly 2.72 per cent, representing the average best fixed rate that year, according to data provided to the Star by Ratehub.

Homeowners who bought a home at $819,000 (the average price in Toronto in 2019) with a 10 per cent down payment and a 25-year amortization rate would have a monthly mortgage payment of $3,488.

If interest rates rise by another one per cent over the next two years, the renewal rate would be around 5.24 per cent and the mortgage payment would increase to $4,568 per month. That represents an increase of $1,080 more each month, or an additional $12,960 annually.

Assuming a two per cent increase, however, homeowners could expect a jump to 6.34 per cent, bringing monthly payments to $5,017. That means an additional $1,529 per month on mortgage payments, or $18,348 annually.

“There’s no doubt that going from two to four per cent (interest) has a big effect on mortgage payments,” Laird says, since that two per cent hike represents double the amount of interest paid each month.

The good news, he adds, is that the principal will have decreased over the five years since the homebuyer received their mortgage, meaning their new rate will also be recalculated with the remaining loan.

Homeowners looking to plan ahead could use an online calculator to see what their new rate might be, Laird suggests, in order to budget ahead for changes to their monthly payment.

From there, work out what the source of that additional money each month will be, or if that cash is already available.

If it isn’t, Laird says, come up with a plan to pay the mortgage, such as cutting back on some expenses or selling an extra car.

“Budget for the higher payments … it might be painful, but, hopefully, it’s possible,” he says.

In situations where the money doesn’t exist, due to an “extraordinary detrimental event” (such as a job loss for one or both incomes or an unusual expense), Laird adds, your existing lender should be able to work with you. In some cases, he says lenders might offer a “payment holiday,” where one or two payments are paused and then picked up again later.

Lenders don’t want to force homeowners into selling, he says, but they won’t work with you if renegotiating is just “delaying the inevitable.” If your home is truly no longer affordable, the best option might be to sell, Laird says.

Back in Toronto’s Weston neighbourhood, Edwards isn’t worried that she might lose her home when the time comes to renew. But with rates rising, that means less money each month to put toward the principal payment and more toward paying off the debt.

“Things will be a bit tighter,” Edwards says, but adds she’s prepared for what’s to come.

“We’re maintaining our emergency fund,” she says. “We’re in a better position than (some).”