Mortgage Payment Shock In Canada

Mortgage Payment Shock In Canada

Toronto Star just released an article about a report released by RBC analysts that has raised some concerns for homeowners.

The report, titled “Canadian Banks: A Review of Mortgage Payment Shock,” revealed that more than $900 billion in mortgages at Canadian banks are set to renew in the next three years.

The article said that “around 60 percent of mortgages at Canadian chartered banks are set to renew between now and 2026, hurting banks’ profits and homeowners’ wallets amid soaring borrowing costs.”

Some borrowers will see their mortgage payments rise by nearly 50% at their next renewal.

Mortgage payment shock refers to the significant and sometimes unexpected increase in a homeowner’s monthly mortgage payment at the time of renewal. As you may assume, this can disrupt financials in extreme amounts when considered at this level.

There are four common causes of mortgage payment shock:

Adjustable-Rate Mortgages

Also known as ARMs, adjustable-rate mortgages are one of the most frequent culprits. With ARMs, interest rates can fluctuate following an initial fixed-rate period, resulting in higher monthly payments. Of course, this should be expected by homebuyers in the first place, but can still lead to financial disruption when it does eventually rise.

Escrow Account Adjustments

When you make your mortgage payments, some of the money goes towards property taxes and homeowner’s insurance. These funds are kept in a special account called an escrow account. If these expenses increase due to rising property values or insurance premiums, it can lead to a sudden payment shock.

Changes in Mortgage Terms 

If refinancing or restructuring a mortgage is required, it can alter the original terms and conditions. This can lead to higher monthly payments.

Economic Factors 

Changes in the economy, like inflation or higher interest rates, can affect how much you pay for your mortgage.

The Cause of the Mortgage Payment Shock Wave

Over half of Canadians are choosing three-year, fixed-term mortgages, which are expected to renew at 6-8 percent compared to November 2019 when the same interest rate was 2.84%.

More than $186 billion in mortgages are set to renew in 2024. With the difference in interest rates today, the expected payment shock is a whopping 32 percent.

In 2026, $400 billion in mortgages are renewing, with payments rising as much as 48 percent. 

Payments are expected to increase by 20 percent. The benchmark interest rate is currently 5 percent, which is the highest rate in over 20 years. The increases were made in an attempt to curb inflation, but we are still here.

Are There Ways to Prepare for Mortgage Payment Shock?

There are ways you can prepare for it, let’s get into them:

• Create a detailed budget for all your housing expenses. Include possible increases in property taxes, insurance premiums, and utility costs. This will help you make sure you can absorb these financial changes, and know what you need to change if you can’t
  

• Create an emergency fund. Try to save enough money to cover unexpected home costs or higher mortgage payments.
  

• Consider choosing a fixed-rate mortgage instead of an adjustable-rate mortgage to avoid uncertain interest rate changes, but if you choose an adjustable-rate mortgage, just know that it’ll change

Canadian banks are working to lower the impact of payment shocks. Homeowners have choices to increase monthly payments, switch to a fixed-rate mortgage, make a lump sum payment, or extend the amortization period.

The Office of the Superintendent of Financial Institutions, Canada’s biggest banking regulator, has instructed major banks to set aside billions of dollars in rainy-day funds for potential debt defaults. Banks have responded by nearly tripling the amount they typically set aside for bad loans compared to the third quarter of 2022, just to counteract this issue.

Mortgage payment shock is a significant cause for concern for homeowners but it’s not an impossible challenge. To be ready for potentially higher mortgage payments, understand what causes them and plan your finances wisely.