Canadians with fixed-rate mortgages 'terrified' in face of higher interest rates upon renewal

Economic analyst reacts to latest rate decision Economic analyst DT Cochrane gives his opinion on the Bank of Canada's decision to hold the key interest rate at 4.5%.

After seven interest rate hikes implemented by the Bank of Canada in 2022, Anita Gupta says she won’t be able to afford her home payments by the time her fixed-rate mortgage comes up for renewal in March.

As a result, Gupta said she has no choice but to sell her home.

“We don’t stand a chance … we’re packing right now,” Gupta told CTVNews.ca in a telephone interview on Thursday. “It's going to be extremely difficult to renew because the interest rate is going to be twice as much.”

Diagnosed with fibromyalgia, the 62-year-old Kitchener, Ont., resident said she is currently receiving disability support while her husband receives a pension. With a fixed income, the couple won’t be able to handle any increases in their mortgage payment, Gupta said.

Gupta is one of dozens of Canadians with fixed-rate mortgages who wrote to CTVNews.ca, concerned about facing substantially high interest rates by the time they renew their mortgage. The emailed responses have not all been independently verified.

Her current mortgage has a fixed interest rate of 3.54 per cent on a one-year term, said Gupta, who purchased her mortgage from a B lender. Prime mortgage lenders, or A lenders, include Canada’s major banks and credit unions. B lenders, such as trust companies, can act as an alternative for those not eligible for a mortgage from an A lender. Looking at interest rates offered by lenders now, Gupta said she is seeing five-year fixed-rate mortgages hovering around the six-per-cent mark.

In an effort to save money, Gupta and her husband have decided to sell their house and purchase a smaller, cheaper one. They plan to list their home in early January, although Gupta said she remains unsure of whether they’ll secure a new property within their budget by March.

“We’ve been going to Hamilton to look at places,” she said. “We hope that come March, we do have a home [but] that is still a question mark.”

Fixed-rate mortgages are tied to bond yields, explains Leah Zlatkin, a Toronto-based mortgage broker and LowestRates.ca expert. A bond is a loan distributed by an investor. Banks will typically set fixed rates based on their appetite for risk, Zlatkin said.

Unlike variable-rate loans, those with fixed-rate mortgages pay the same interest rate for the duration of their agreement. While they may not immediately feel the impact of rising interest rates, there is a renewal period at the end of each term, during which borrowers will need to sign a new agreement.

Due to rising interest rates, some Canadians expecting to renew their mortgage in the near future will likely lock in a higher rate, which may leave them paying hundreds more each month, Zlatkin said.

This is the case for Syed Mubarak and his wife, who renewed their fixed-rate mortgage earlier this month. In 2021, the couple secured a one-year mortgage from a B lender at 2.2 per cent interest. Since renewing, the couple’s monthly mortgage payments for their Newmarket, Ont., home have risen to approximately $6,500 from $4,000, and they now pay 6.2 per cent in interest.

“That was really frustrating to see,” he told CTVNews.ca in a telephone interview on Sunday. “Almost $4,500 is going straight to interest.”

Although the couple hoped to start a family after moving into their new home, these plans have been put on hold, he said. Since June, Mubarak has been working about 80 hours per week at two full-time jobs in order to stay ahead of upcoming mortgage payments.

“It doesn’t really make sense to start a family … when am I going to really have time to spend with my child?” he said. “It’s really demotivating [when] you don’t even know if you’ll have a home to enjoy these times with family.”

The couple’s new mortgage agreement is with their current lender for another one-year term, Mubarak said, and both hope interest rates will fall as quickly as they have risen.

The Bank of Canada recently increased its key interest rate by 50 basis points on Dec. 7, bringing it to 4.25 per cent. As of Dec. 8, the average five-year variable mortgage rate for refinancing is 6.05 per cent, Zlatkin said, while the average five-year fixed mortgage rate is 5.44 per cent.

While the Bank of Canada suggested it may be ready to push pause on interest rate hikes, further increases have not been ruled out entirely.

In the meantime, Mubarak said he will continue working while cutting back on discretionary expenses, such as eating at restaurants and visiting movie theatres.

“There’s no real solution,” he said. “We don’t have an option other than to work as much as we can to make ends meet.”

CANADIANS WEIGHING THEIR OPTIONS

Given the rising cost of necessities such as food, the uncertainty around being able to afford rising mortgage payments is leaving Tahir Mahmood “terrified,” he said.

Mahmood and his wife purchased their home in Cochrane, Alta., in 2018 with a five-year fixed-rate mortgage from an A lender at 3.29 per cent. Mortgage rates currently offered by lenders, however, are around the six-per-cent mark, he said. This would take his monthly payments from $1,985 to about $2,500.

“We’re barely affording our mortgage as it is,” he told CTVNews.ca in a telephone interview on Thursday. “When we bought the house, the plan was that the payments are supposed to go down as you pay off the house – it's quite the opposite now.

“We’re just kind of trapped.”

The couple has two children, aged six months and three years. With his wife currently on maternity leave, Mahmood works up to 70 hours per week at two jobs in Calgary. The 31-year-old said he sometimes wonders whether spending so much time at work is hurting his relationship with his family.

“I come home and sometimes my daughter cries and she says, ‘Papa, don’t go to work,’” he said. “I'm always working … and you ask yourself, is it even worth it?”

With several months until he is expected to renew his mortgage in May, Mahmood said he is considering his options, including purchasing a variable-rate mortgage for the next few years.

Mehdi Amiri is in a similar position. His bank called on Dec. 5 to notify him of his mortgage renewal in May, and offer him the chance to secure a new rate in advance. However, renewing his mortgage now would result in a $1,200 increase in monthly payments for a five-year fixed-rate agreement from the A lender, he said.

“I was shocked,” the 36-year-old told CTVNews.ca in a telephone interview on Sunday.

Earlier this year, the Richmond Hill, Ont., resident tried to break out of his four-year fixed-rate contract to take advantage of low variable rates, he said. However, he would have to pay his lender a penalty of $18,000 to do so.

To avoid this, Zlatkin recommends that those renewing their fixed-rate mortgage opt for a two-year product “to ride out the uncertainty of the next two years.”

Despite the rapid rise in interest rates throughout 2022, Zlatkin expects rates to drop after the next couple of years, she said. As higher interest rates continue to reduce demand, it’s likely lenders will eventually offer better discounts on mortgage rates to persuade people to purchase, she said.

“When there’s a low enough demand and high enough supply of money in the lending sector, lenders are forced to compete to get your business,” she told CTVNews.ca in a telephone interview on Thursday. “Lenders may be incentivized to start lending money at a better rate for the consumer.”

SOME HOMEOWNERS HAVE A ‘BACK-UP PLAN’

One way to reduce mortgage payments involves refinancing an existing mortgage to extend the amortization period, Zlatkin said. This is the amount of time allotted to repay the loan.

“Even though the interest rates are a little bit more, the actual payment amounts are going to be smaller,” she said. “For somebody who is … struggling financially because it's expensive for them to maintain their monthly costs, that is absolutely the right [option].”

Switching lenders may also help Canadians lower their monthly payments, Zlatkin said. But Canadians must be prepared to requalify for their mortgage, which means passing another stress test. Borrowers must prove that they are able to afford interest payments as high as two per cent above their mortgage contract rate, or 5.25 per cent, whichever is higher.

“This could be a challenge for many Canadians who are up for renewal,” she said. “They may just have to the bite the bullet and sign whatever paperwork they get from their bank because you don’t have to requalify.

“It puts people in a precarious situation,” she said.

Danielle Pfeifer’s mortgage with an A lender is up for renewal in January, she said. Although she has been speaking with different lenders about obtaining a two-year fixed-rate mortgage, she worries about having to requalify, she said.

“It's likely that I might not be able to qualify because of the higher interest rates,” she told CTVNews.ca in a telephone interview on Thursday. “And with my income, it's a high risk for the bank.”

Pfeifer works two jobs as a hotel manager and a farrier, which is a specialist in horse hooves. In order to make ends meet, she plans to rent out part of her five-bedroom home in Whitehorse, Yukon, in addition to cutting back on spending.

Margaret Stuart said she will also be leasing out three bedrooms in her Eganville, Ont. home starting in January to cover rising mortgage rates and other expenses. Although her fixed-rate mortgage is not up for renewal until 2025, she is already planning ahead.

“I only think prices are going to get higher and higher,” the 47-year-old told CTVNews.ca in a telephone interview on Thursday. “I just like to have that back-up plan, it makes me feel more secure.”

Stuart will likely rent out her home until her mortgage is completely paid off, she said. While she remains unsure of what interest rates will look like by 2025, she is optimistic about her ability to get by.

“I’ll always find a way,” Stuart said. “I know I’ll figure it out.”

With files from CTV National News Producer Jordan Gowling