Fixed rate mortgage? Here’s how much more you might have to pay when renewing – and what to do if you can’t afford it

Toronto homeowner Barbara Edwards wonders when she’ll see interest rates rise.

Alongside her partner, Edwards bought her home in 2019 amid falling mortgage rates. Given that average rates were historically much higher and were at an all-time high, Edwards said she had long expected them to start rising again.

People with five-year fixed mortgages who bought their homes at lower interest rates will sooner or later renegotiate their rates – and with the Bank of Canada raising interest rates to calm inflation, many are on the point of seeing their monthly housing payments increase.

Edwards says she and her partner made sure to buy a home that fit their budget so they could prepare for the potential rate hike.

“We wanted to make sure that if any of us lost our job or got too sick to work, we could still afford to pay for our house on one income,” she says. The couple opted for a 30-year mortgage because they knew they would have extra expenses in the first year and planned to pay extra for the main loan later.

What’s uncertain is exactly how much more per month landlords like Edwards will pay over the next few years.

James Laird, CEO of mortgage planning website Ratehub.ca, told The Star that people renewing now won’t see much of a change just yet. These people would “probably still renew at a fairly low rate” because you can maintain previous interest rates for four months, he explains – so people renewing in June, for example, could still get a rate lower from February or March.

Homeowners will start to feel a pinch in the fall, Laird says, when people start going from two or three percent interest rates to four or five.

It’s impossible to predict where rates will be two years from now, he adds. Right now, Ratehub’s best interest rate is 4.34%, up almost exactly 2% from the 2019 lows.

Laird walked the Star through some math to give homeowners some insight into the new rates they could pay. The calculations assume a home was purchased in 2019 on a five-year fixed mortgage, with a renewal pending in about two years. They also assume an average purchase price and interest rate for that year.

A homeowner who bought a home at a five-year fixed rate in 2019 would have an interest rate of around 2.72%, which is the best average fixed rate that year, according to data provided to the Star by Ratehub.

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

If interest rates increased another percent over the next two years, the renewal rate would be around 5.24 percent and the mortgage payment would increase to $4,568 per month. That’s an increase of $1,080 more each month, or $12,960 more per year.

Assuming a 2% increase, however, owners could expect a jump to 6.34%, bringing monthly payments to $5,017. That means $1,529 more per year on mortgage payments, or $18,348 per year.

“There’s no doubt that going from 2% to 4% (interest) has a big effect on mortgage payments,” says Laird, since that 2% increase is twice the amount of interest paid each month.

The good news, he adds, is that the principal will have decreased in the five years since the buyer received their mortgage, which means 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, to budget for changes to their monthly payment in advance.

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

If not, Laird says, come up with a plan to pay off the mortgage, like cutting some expenses or selling an extra car.

“Budget for 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 adverse event” (such as a job loss for one or both incomes or an unusual expense), adds Laird, your current lender should be able to work. with you. In some cases, he says, lenders may offer a “payment holiday,” where one or two payments are suspended and then resumed later.

Lenders don’t want to force owners to sell, he says, but they won’t work with you if renegotiation just “delays the inevitable.” If your home really isn’t affordable anymore, the best option might be to sell, Laird says.

Back in Toronto’s Weston neighborhood, Edwards isn’t worried about losing his home when it comes time to renew it. But with rising rates, that means less money each month to spend on principal payments and more on debt repayments.

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

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

Jenna Moon is a Toronto-based business journalist specializing in personal finance and affordability. Follow her on Twitter: @_jennamoon

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