Canadians facing the mortgage renewal cliff have options

Many Canadians who are already stressed by the rising cost of living are now bracing for the financial impact of higher mortgage payments at renewal time.¹ While the Bank of Canada’s recent interest rate cut has been welcome news, additional cuts in the near future may be in jeopardy with inflation still running hot.

Millions of mortgages are up for renewal through the remainder of 2024 and 2025, and many Canadian households are now grappling with the reality that payments will be going up, adding more pressure to stretched household budgets.

“Rising monthly mortgage payments will be a lot for people to manage,” says David Frazer with Manulife Bank. “The average household budget is already stretched so thin with the increasing cost of groceries, gas and other essentials. And the amount of consumer debt remains at an all-time high, hovering around $1.80 of debt for every dollar of income earned.”²

Homeowners with variable rate mortgages have been the first to feel the pinch of rising interest rates. A survey by real estate giant Royal LePage found that 64 per cent of Canadians holding a variable rate mortgage said that rate increases have caused their mortgage payments to hit what’s known as a trigger rate. The trigger rate is the interest rate at which your mortgage payment no longer covers the interest portion of the loan, which may lead to increases in your payments to ensure you’re paying down the principal.

“Trigger rates are worrisome with homeowners facing significant financial strain,” says Frazer. “In addition to increasing your payments, a lender may offer to extend the amortization of the mortgage – adding years to the repayment schedule.”

The impact of higher mortgage payments can quickly lead to snowballing of other debt to maintain the status quo. 

“Consumers might be able to keep up with their higher mortgage payment, but it might mean racking up more debt,” says Frazer. “They want to keep the kids in daycare, they might need the mobility that a two-car household affords, and so they turn to other credit measures to make ends meet.”

The situation can leave you feeling backed into a corner with no way out. But this is where your advisor can offer a path forward. One option involves financial consolidation.

“The solution is flexibility,” says Frazer. “Rather than a conventional principal and interest mortgage, whether it be a fixed rate or a variable rate, there’s the option to combine your income, mortgage, car payments, credit card debt, short term savings and other household expenses in one place.”

This repayment solution is known as an all-in-one readvanceable mortgage – a banking product that comes with distinct advantages:

• Flexibility to increase or decrease mortgage payments
• Easy access to home equity
• Reduction of interest costs to become debt-free faster

“This type of banking product allows a consumer to more easily manage monthly cash flow,” says Frazer. “It can be a great option for people facing mortgage renewal because you can be flexible with your payments rather than obligated to meet a fixed principal and interest payment, especially with today’s higher rates and higher payments.”

Learn more about Manulife One.

Benefits of all-in-one banking

Flexibility: If you have borrowing room, you can increase or decrease payments as needed and access available home equity.

Customization: There’s an option to set up sub accounts within the main account to better organize how you pay down debt. A sub account can be set up with its own payment schedule and amortization period to help pay down debt by a specific date.

Financial savings: Whether it’s savings or income, money deposited into an all-in-one account immediately helps reduces your debt and the interest you’ll pay. Reducing your loan balances lowers your borrowing costs, helping you to become debt-free faster. 

Simplified banking: Combining all of your accounts together means there’s only one account to manage with one statement. 

If a mortgage renewal is in your future, now is the time to begin preparations. And know that you aren’t alone in trying to figure out the best course of action – your advisor is there to help.

“Start planning now with your advisor and see what the numbers might look like at renewal,” says Frazer. “Consider different mortgage options, even if you're in a locked term now. Evaluate your situation and prepare for what the increased payments might be. Get ahead of the situation now rather than scrambling to keep up.”