The Bank of Canada has now raised interest rates to their highest level in 22 years but many borrowers still haven’t been hit in the pocketbook.

Earlier this week the central bank pushed up its key overnight lending rate to five per cent, marking the 10th increase since March 2022.

For some variable rate mortgage holders with floating payments the pain from the latest hike will be immediately felt and will amount to about $14 more a month for every $100,000 owing on their mortgage.

But for other homeowners, who may have fixed rates or variable mortgages with fixed-payments, the impact is more likely to be felt at renewal.

Approximately half of all mortgages in Canada are set to renew in 2025 or 2026 due in part to the real estate frenzy that transpired over the course of the COVID-19 pandemic.

“For the fixed rate people it's going to be much less catastrophic. Many of those people will be able to shop for new mortgage and they will qualify because their mortgages are smaller due to the good payments they've made and they can manage it (the higher payments),” mortgage broker Ron Butler told CP24.com. this week. “The variable situation is somewhat more concerning because there may be no principal being paid down or it (the balance of the loan) might have even grown (due to fixed payments that don’t even cover interest).”

If you have a mortgage coming up for renewal here is what you need to know about this higher rate environment.

SOME PAYMENTS COULD SKYROCKET

Many variable rate mortgage holders – those at four of the six big banks - have what is known as fixed payments. That has meant that as rates have increased more and more of their money has gone to interest rather than principal, even as their total payment has remained the same. The practice has, in turn, created a situation where some homeowners have amortizations that have risen well beyond the ones they agreed to when they first took out their mortgage and that is likely to be a problem come renewal.

“Because of these rate hikes some homeowners might have an amortization of 60 years and the current lender will likely not allow them to keep that,” RATESDOTCA mortgage expert Victor Tran told CP24.com. “They will need to bring it down to the contractual amortization and if that happens their payments are going to skyrocket. It is going to be a lot higher than what they are currently paying.”

Tran said that he expects lenders to show some flexibility when it comes to homeowners who haven’t been paying off much, if any, principal.

But he said that it is not likely that homeowners will be able to keep extended amortization periods forever, an opinion that Butler also holds.

Butler told CP24.com that banks “will almost always” offer a chance to go back to a 30 year amortization, which is the maximum allowed.

But he said that might not make an enormous amount of difference for a homeowner whose payment is set to double, say from $2,000 to $4,000 a month.

“They (the bank) may look at it closely and find out that yeah, you are right, you're just hopeless and you can never make the (new) payment. If that is the case they are allowed by the regulator in some cases to go to 35 years or even a 40-year amortization if there is proven financial inability to pay. But again, it doesn't reduce the payment back to $2,000,” he said.

RATES WILL LIKELY BE HIGHER REGARDLESS OF WHEN YOU RENEW

The Bank of Canada has said that it expects inflation to return to its two per cent target in the middle of 2025. That would allow for interest rate cuts. But few industry insiders expect rates to return to the levels that they were at in 2020 and 2021 anytime soon, if ever.

“We're never coming back to those days when people were getting rates of 1.59, 1.89, 1.99. It is gone forever,” Butler said. “So whatever rate you get is guaranteed to be higher than what you started with five years before. It will either be a little bit higher, instead of two per cent it will be three-and-a-half per cent, or it will be lot higher, like in the six per cent range. So that is the key thing to understand. It is that everyone is going to have to pay more.”

“Over the past month we've seen fixed rates increase by a full percentage point,” Tran added. “That’s huge”

YOU MIGHT NOT BE ABLE TO SWITCH LENDERS

Many homebuyers who took out mortgages in 2020 or 2021 did so with historically low interest rates. The stress test meant that those homebuyers still had to qualify at a rate of 5.25 per cent or their contractually agreed upon rate plus two percentage points, whichever was higher. But those seeking to take out a new mortgage today or jump lenders could be stress tested at a rate in excess of eight per cent. That, says Tran, could leave many existing homebuyers with few options other than to renew with their current lender where they will be able to avoid the stress test.

“I've had many customers or former clients that are simply not able to take advantage of lower rates with other lenders because they can't qualify to switch out so they are at the mercy of the current lender,” he told CP24.com. “I think a lot of the lenders know that unfortunately that these customers will have difficulty qualifying elsewhere. But it's unfortunate because they're not going to offer these customers the best rate possible. They're kind of holding them hostage and just giving them a mediocre rate because they know that they have nowhere to go.”

REFINANCING COULD ALSO POSE CHALLENGES

One way that home owners could reduce the payment shock is by extending their amortization. But doing so isn’t necessarily easy, warns Tran. He says that some homebuyers won’t qualify for a new mortgage due to the stress test while others might conclude that the costs of doing so are just too onerous.

“Anytime you make a major change like that you have to go through the whole nine yards again. You have to requalify, you have to go through the stress test again, you have to potentially get an appraisal done at your cost and you have to get a lawyer involved to register a new mortgage title, also at an additional cost,” he told CP24.com.

PATIENCE IS KEY  

Butler says that his best advice to homeowners staring down an impending renewal is “not to panic.” He says that in many cases a bank might offer an early renewal with a so-called blended rate but he said taking such an offer is almost always a mistake, when it replaces a lower rate obtained prior to this recent run up in the cost of borrowing.

“Don't give up 3.19 and take 5.1 as some kind of protection,” he said. “If you have a renewal coming up shop around, don't blend and only start looking at it 90 days before the date of your renewal because you don't want to give up that great rate. That just doesn't make sense.”