Mortgage mayhem

Local residents feeling the financial pinch as reality of higher interest rates sets in

Mortgages in Canada coming due in 2024 are equal in value to the annual Gross Domestic Product of New Zealand. That’s $250 billion dollars give or take. 2025 is expected to be an even bigger year with a staggering $350 billion in mortgage renewals expected.

In the COVID era when most of those mortgages were signed, it was hard for Canadians to resist what were the lowest interest rates in a lifetime, and renewals, early renewals, and first-time mortgages were abundant. In fact, the lowest one-year fixed mortgage rate in history was 2.79 per cent in 2021.

But, that historically low rate couldn’t last, and now that they have corrected, 80 per cent of all mortgages outstanding as of March 2022 are coming due at still attractive – but higher – rates. Some of us will remember 1981 when a 12-month mortgage reached an astonishing 21.75 per cent.

Local mortgage broker Melony McAndrews notes that people who contact her all say they are concerned by the increase in rates. “I have clients who currently have a three per cent interest rate and are getting quotes from banks at 6.85 per cent. Everyone is worried since they already feel their budgets are stretched to the limit with the way entertainment, food and gas prices are.”

For context, the monthly payment on a $500,000 mortgage at 2019’s 3.25 per cent becomes $550 more per month at 2024’s 5.25 per cent.

The good news is that the Bank of Canada prime rate did drop in June, a quarter of a percent. The bad news is that experts are divided on whether we will see further reductions. The worse news is that only variable mortgage rates are tied to the Bank of Canada rate. If you are after a fixed rate, McAndrews suggests you pay attention to the five-year Canada Savings Bonds yields. Fixed rates generally run one to three per cent higher than what they are paying.

McAndrews, however, believes the average consumer has a few ways to improve their debt load. She prefers to look at a client’s entire financial situation, not just what appears on a credit check. That’s because a credit check doesn’t show drains on income like having children in daycare or supporting an aging family member. Then it’s easier to work out a plan.

One family she worked with had two full-time employed adults and two teenagers living at home. Restructuring their mortgage and their finances saw a dramatic saving in monthly expenses. Despite a 1.8 per cent increase in their mortgage rate, they were able to lower their monthly expenditures to $4,614 from $6,373. Part of that savings came from moving credit card debt (serviced at around 20 per cent) to the mortgage where they paid far less interest.

Additionally, McAndrews was also able to find the family a rate lower than what the banks were offering. Private lenders, trust companies, and other financial institutions will give mortgages, so the big five Canadian banks are not your only places to get a loan.

Interestingly, McAndrews said the lowest rate is not always the best solution. Frequently, the lowest is often only offered on a straight renewal. Conditions typically exist so it can’t be used to refinance (as in our credit card debt example above), or may not offer a prepayment option, or comes with a higher penalty should you want out of the mortgage, or perhaps has a longer locked-in term than you need.

More people are using mortgage agents since searching online for a mortgage is not as simple as just comparing rates and going with the lowest. With time-limited offers, introductory rate cut offers, insured vs uninsured offers, first time buyer offers and so on, it sometimes pays to have a professional weed through the options for you.

Kassie Nicholle, a retired educator, used a broker five years ago for the first time and had no hesitation about calling her again when her mortgage was due. In fact, she didn’t have to call since the broker initiated contact when the mortgage was getting close to expiry, and they had a discussion about her current finances. Her lender also made contact, but only with a letter that included a renewal contract with standard terms in place that could be signed and returned.

Her mortgage was not held by one of the big five banks, and when that company didn’t come up with the best rate, she switched — this time to another trust company.

“I was really just looking for the best rate possible. In spite of the rate increase from five years ago, my mortgage only went up by $145. But there was an unexpected benefit to using a broker. My agent explained everything to me in everyday language, so I understood it easily, and answered all my questions. And I didn’t have to leave home to do it.”

Joe Fischer took a different approach when his mortgage was due on May 30. With only five days until the June prime lending rate announcement from the Bank of Canada, he elected to let his mortgage expire without any new mortgage worked out. Under the terms of his agreement, he automatically converted to a six-month fixed term mortgage until a new one was settled. He gambled that a rate reduction was coming and that it would improve on what he had been offered by his big bank lender.

Unfortunately for him, his bank didn’t make any change to their fixed rates. However, during that five-day gamble he did contact numerous other lenders who were willing to offer a better rate.

“I was able to get my bank to match the best rate and avoid all the paperwork involved in setting up a new account at a new institution,” says Fischer.

For starters, Fischer (who freely acknowledges he is a terrible record keeper and uses a variation of the Oscar Madison filing system) was going to have to come up with a copy of his separation agreement, his notice of assessment, three months of bank records showing income deposits, mortgage statements and renewal offers from the current lender, proof of fire insurance, and a direct withdrawal permission form.

Doing all that while working a job that doesn’t have banker’s hours with the pressure of an expired mortgage made staying with his existing bank the easiest solution. It is true that much of that could have been done online, but the process predicated on having facial recognition technology, access to reliable cell service, and confidence in the security of the cloud. He said the digital document filing procedure rarely worked seamlessly.

The one thing Fischer did do right was to take advantage of the annual 15 per cent prepayment option before his mortgage expired.

“I made a lump payment that ended up reducing my monthly charge by $240, saving me $14,000 over the five-year mortgage.”

If he invested that same lump in a GIC for five years, it would have earned almost $9,000.

After recently selling a house, Jennifer Gregson will not have a mortgage in August. And, she is not convinced she will ever have one again. The newly single 50-something acknowledges she has less earning power and less credit power than ever, and most importantly, less time.

When people buy a house – COVID-based price anomalies aside – they typically see the return on it many decades later. Lee thinks she doesn’t have that kind of time to wait for a nice payoff. So, she is considering permanently renting and investing the difference between the mortgage payment and the rent. As a renter, you’re likely to have more money on hand in the short-term to diversify your portfolio.

Gregson also has the luxury of a job that she can work at from anywhere, so moving to an area where rents do not rival a mortgage payment is an option. Flexibility has a big appeal to renters: if you do find a house you want to buy in the future there is no waiting for yours to sell, you can jump on a deal immediately. Likewise, plumbing problems, leaky roofs, and overgrown gardens are not issues for the renters to solve.

Given the sensitivity of the financial information shared, the Advocate has used pseudonyms for those who were renewing their mortgages.