The latest rate hike makes homeowners see another $103 on mortgage monthly payment

Last week the overnight lending rate jumped another 0.25 per cent. That’s pushed variable rate mortgages to 6.15 per cent from 5.95 per cent, immediately impacting monthly payments. The rate hike continues to place homeowners under financial stress as variable rate mortgages keep climbing and fixed-rate mortgage holders face renewal.

For an average Toronto home, bought for $1.08 million with a 20 per cent down payment and 25-year amortization, homeowners are looking at a mortgage payment jumping to $5,612 from $5,509 — a $103 increase.

The five-year fixed rate mortgage has remained the same at 5.14 per cent with a monthly mortgage payment of $5,101 for the average Toronto home with a typical down payment and amortization.

“The pressure right now is really on people with a variable rate mortgage,” said James Laird, co-founder of RateHub.ca.

There are two types of variable rate mortgages: those with a fixed monthly payment and those with a variable payment.

Homeowners with a variable monthly payment absorb each rate hike into their monthly payment, meaning their monthly payments increase in lockstep with the rate hikes. But homeowners on a fixed variable pay the same monthly amount until hitting their trigger rate — when their interest payment exceeds the total payment.

“Once they hit their trigger rate, then speaking to a lender to increase the mortgage payment will be needed and that can extend the amortization period,” Laird said.

Homeowners with a home equity line of credit (HELOC) — a line of credit secured by the person’s home that provides a revolving line of credit to use for large expenses — will also be feeling the financial squeeze.

Many homeowners — in happier times when the housing market was booming and property values seemed to be on a never-ending upward trajectory — used HELOCs to make investments on a second property, allowing them to take out a second mortgage. But it often involved a variable rate mortgage, not fixed.

“People with a substantial balance on their HELOC will be feeling this rate hike immediately,” he said.

Homeowners on a five-year fixed mortgage facing renewal will be paying a higher mortgage amount than five years ago, but those mortgages have been subjected to mandatory stress tests to insure homeowners can handle rate hikes, said Leah Zlatkin, a mortgage broker and expert with rate comparison website LowestRates.ca.

The five-year fixed rate is 1.5 per cent to 2 per cent higher than it was five years ago, and the stress test ensures homeowners can pay two per cent higher than their current mortgage rate.

“Most people will be in a safe position to renew,” Zlatkin said. “There will still be payment shock at the start, but it will be manageable.”

Variable rate mortgage holders feel the rate hike pain more acutely. But if homeowners have been putting more money into their savings, aggressively paying their principal payment, and cutting back on extraneous spending, the payment increases can be managed, Zlatkin added.

There is a silver lining as the Bank of Canada likely ended its rate hike cycle last week, experts say.

Since March 2022, the Bank of Canada has hiked the overnight lending rate eight times to help cool soaring inflation. The rate went from a historic low of 1.5 per cent to 4.5 per cent in less than a year.

However, mortgage rates will remain elevated for the foreseeable future, said Robert Hogue, senior economist, Royal Bank of Canada.

In 2023, variable rate mortgages are likely to remain at around six per cent and fixed-rate mortgages will be in the 4.5 per cent to 5 per cent range, economists say.

“We’ll likely see home prices bottoming out in the spring or summer of this year,” Hogue said. “There could be increased activity in the market once that happens.”

While home prices have undergone a major correction — with the average home price in the GTA down 20 per cent from its February 2022 peak — it’s unlikely home prices will reach pre-pandemic levels.

“We’ve seen a correction of the huge 50 per cent increase over the pandemic and that correction will likely continue over the coming months,” Hogue said. “There will be a partial reversal of what we saw in the pandemic but it’s unlikely to go back to 2019 prices.”

Fixed-rate mortgages are tied to bond yields, explains Zlatkin, banks will typically set fixed rates based on their appetite for risk.

Anita Gupta said, she wouldn’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 had no choice but to sell her home.

“We don’t stand a chance … we’re packing right now,” Gupta said. “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, concerned about facing substantially high interest rates by the time they renew their mortgage.

In an effort to save money, Gupta and her husband have decided to sell their house and purchase a smaller, cheaper one. But she remained unsure of whether they’ll secure a new property within their budget by March.

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.”

Part of the article was reported by the Star.