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During the pandemic, mortgage rates were hovering near record lows, giving homebuyers plenty of incentive to get into the housing market.

But these same borrowers are now facing looming mortgage renewals. The problem is, mortgage rates are a lot higher today than they were a few short years ago. That means mortgage holders may be forced to renew their home loans at much higher rates, which could pile on hundreds of dollars to their monthly payments. 

Millions of Canadians are facing what’s known as the “mortgage cliff.” But what exactly does this mean, and how can it affect you if your mortgage term is coming due?

What Is A Mortgage Cliff?

The spike in mortgage payments that many homeowners will be faced with come renewal time is known as the “mortgage cliff.” Mortgage rates are much higher today than they were a few years ago, and homeowners who locked in at low rates back then may be stuck paying much higher rates as renewal approaches.

Mortgage Cliff In Canada: What To Expect

The situation could be exacerbated if rates continue to climb. Despite having peaked in late 2023 and even dipped slightly since then, mortgage rates may resume their ascent as the Government of Canada (GoC) 5-year bond yields have been spiking. Bond yields typically influence fixed mortgage rate pricing, which means the recent uptick in yields may end mortgage lender interest rate slashing and lead to an increase in rates once again.  

Millions of Canadians will be renewing their mortgage over the next couple of years. Last year, over 290,000 mortgages were already renewed at a higher rate than their previous mortgage contracts

But in 2024 and 2025, a whopping 2.2 million mortgages are up for renewal in Canada. That’s almost half of all Canadian home loans. And many of these mortgages came with ultra-low rates.

How Much Will Mortgage Payments Increase For Those Renewing in 2024?

Based on the current interest rates, experts believe Canadians will be paying up to $400-$500 more. 

To illustrate, let’s assume a homeowner took out a $500,000 fixed-rate mortgage on a 3-year term at a rate of 3.49%. With these figures, the monthly mortgage payments would be around $2,493.71. At the end of the 3-year term, the mortgage balance would be around $460,225.

If the homeowner renews their loan with a $460,225 balance at a rate of 6.89% on a 5-year term, the mortgage payments would jump to $3,192.29. That’s over around $700 more in mortgage payments every month. 

The situation can be even worse if the rate gap is even greater. Experts worry that the hardest-affected mortgage holders could see their mortgage payments soar by as much as 70%.

Will Canadians Be Able To Handle The Increased Mortgage Payments?

The potential for the mortgage cliff to affect millions of Canadians has caught the attention of the federal government. In response to this threat, the government of Canada introduced guidelines that financial institutions are expected to follow to minimize the effect of much higher mortgage payments. 

Recently, the Canadian Mortgage Charter was established to detail ways that banks and lending institutions are expected to handle “vulnerable borrowers.” More specifically, the mortgage charter outlines the following measures:

Temporarily Extend Amortization Periods

Stretching out the payment period will allow homeowners to make smaller mortgage payments while still working toward paying down their mortgage balance.

No Mortgage Stress Test When Switching Lenders

This will boost competition among lenders and make it a little easier for borrowers to secure a mortgage they can afford. 

Lump-Sum Payments To Avoid Negative Amortization

Lenders will have to give homeowners the option to make lump sum payments without penalty to avoid negative amortization. Negative amortization occurs when your mortgage payments aren’t enough to cover the interest portion, causing your mortgage to increase despite making your payments.

Tips On How To Handle A Mortgage Cliff

There’s little anyone can do about the direction mortgage interest rates are taking, but there may be some steps homeowners can take to avoid the dreaded mortgage cliff:

Create A Budget 

Come up with a budget to see if your current finances can handle the new interest rate you’re offered when you renew your mortgage. To do this, create a list of your monthly income and expenses. Then, subtract your expenses from your income to find out how much cash flow you have left. 

If your cash flow is a bit short, break down the expenses column by separating essential costs (like utility bills and groceries) from non-essential costs. Then recalculate to see if this will increase your cash flow enough to cover the higher mortgage payments.

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Speak To A Mortgage Broker

You could approach your current lender to see what options are available to you based on your current situation. They may be willing to work with you to help you avoid the mortgage cliff.

Alternatively, you may want to speak with a mortgage broker, like Mortgage Maestro, to see what other options are out there. Rather than limiting yourself to one lender, you could be accessing the products and rates from dozens of other lenders that may be more affordable than what your current lender is offering. 

Brokers work with a vast network of lenders, so they can shop around on your behalf and find a lender that suits you best and offers you something more suitable for you.

No matter which route you take, make sure you speak with your lender or broker at least two months before your mortgage is due for renewal. This will give you some time to start planning. 

Consider Refinancing

Refinancing your mortgage involves renegotiating the terms of your current mortgage loan contract, including the interest rate and payment schedule. Essentially, you’d be replacing your current mortgage with a new one, typically with a different rate and terms. 

This only makes sense if you’re able to refinance at a lower rate than what you’re currently paying. In this way, you’d be saving money in interest. However, refinancing comes with some costs, so make sure you crunch the numbers first to see if the costs don’t outweigh any potential savings by refinancing.

What Do Interest Rates Look Like In Canada?

As of the week of January 19, 2024, the current 5-year fixed rate for a conventional mortgage is 6.89%, as per the Bank of Canada. Compare that to 4.79% in early 2022. Those who took out a 3-year term in early 2022 could have snagged a 3.49% rate. 

As these mortgages come due, mortgage holders may be looking at a 3.0% or higher jump in rates, which can add hundreds of dollars or more to their mortgage payments. 

Over the long term, mortgage rates will likely steadily decline to a historical range around the mid to high 3% mark. Over the shorter term, the consensus among market experts is that the central bank will hold rates at 5%, and by early 2025, rates may dip under the 5% level. By 2028, we could see rates under 4%. 

Should You Get A Fixed Or Variable Rate In 2024? 

A crucial question mortgage holders are asking themselves is whether to choose a fixed rate or variable rate when they renew their home loans.  

The answer to this question depends on the homeowner and the current market. 

For instance, if rates are expected to decline, it might make sense to go with a variable rate. That way, you can take advantage of lower rates in the near future rather than get locked in at a higher rate today.

On the other hand, if rates are expected to remain the same or increase, opting for a fixed-rate mortgage might be best. If rates do go up, you’ll keep your lower rate safely locked in. 

Fixed rates are also better suited for homeowners with a lower appetite or tolerance for risk. With a fixed-rate mortgage, your monthly mortgage payments will remain the same, which will keep things more predictable and make budgeting easier. And if your finances can’t handle a prospective increase in rates and mortgage payments, a fixed rate is probably the better way to go.

Final Thoughts

The mortgage cliff can put many homeowners over the edge, leaving them with mortgage payments they can no longer afford thanks to rising interest rates. If you’re potentially vulnerable to this situation, reach out to your mortgage lender or broker to find out what options are available to you so you can keep your payments manageable and avoid financial stress.

Mortgage Cliff FAQs

Should you refinance your mortgage earlier instead of waiting for renewal?

If you believe you can get a lower interest rate with a refinance before your mortgage term comes due, you could save money on your mortgage payments. However, be careful of the penalties that come with breaking your mortgage early and the costs associated with refinancing. Compare the difference between the penalty fees and the interest you will save before making a decision.

Are people going for fixed or variable rates more?

Fixed-rate mortgage rates have historically been more popular than variable-rate mortgages in Canada. As of late 2023, the share of fixed-rate mortgages among 3 and 5-year term mortgages was at 68%. This trend is driven by homeowners opting for stability in monthly payments over the potential for future lower rates.

What are the interest rate predictions for 2024?

We may see a slight uptick over the short term if GoC 5-year bond yields increase. However, experts suggest that mortgage rates could dip by the end of 2024 to just under 5%.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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