on August 25, 2023 If your mortgage term matures in the next 2 years, you should act now to find out what you should expect for your next term’s monthly payment amount. It is probably going to be much higher than you expect and you should begin preparing now.
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The future is coming.
Part of me feels ridiculous writing that, but when I look at our economic data on consumer spending, I can’t help but believe that a sizable number of people are living today in complete denial that the future is going to come.
There is a famous Aesop fable called the Grasshopper and the Ants, in which a grasshopper plays all spring and summer while the ants work to prepare their nest and store away food. The grasshopper lives for today because he deserves to have fun. He ignores the coming winter. The ants work diligently through the spring, summer and fall because they know winter is coming and they want to be prepared.
Where am I going with this?
Mortgages.
The most popular mortgage term in Canada is a 5 year fixed rate contract. This means that next year, there will be a substantial number of households who got a mortgage back 2019 (when the average 5 year fixed rate was 2-3%) and who will be renewing into their next contract term at 5.5-6%. For these households, the month after they renew, their monthly payment will go up substantially. For example:
2019 – $500,000 mortgage balance, 30 year amortization, 5 year fixed rate @ 2.5% = $1,972.25 monthly payment.
2024 – $440,266.63 mortgage balance, 25 year amortization, renewing at 6% = $2,816.86 monthly payment.
That’s an increase of $844 in the mortgage payment (over $10,000 per year). Even if the mortgage is refinanced back to a 30 year amortization at renewal, the new payment will still be $2,618.81 – about $646 more per month (over $7,750 per year).
In 2025, it will mostly be people who got their mortgage in 2020 that are renewing. In 2020, the mortgage interest rates were roughly 1.5-2.5%. I don’t have a crystal ball, but it looks very likely that these borrowers will be renewing into rates in the 5-6% range. The payment increase that these borrowers are going to experience is similar to those shown above. If they started with a $500,000 mortgage in 2020 at a 2% rate with a 30 year amortization, when they renew in 2025 they will likely see their monthly mortgage payment increase by around $700-800/month if they continue with their existing amortization timeline, or by $500-600/month if they re-extend their amortization to 30 years.
Do these borrowers have an extra $7,750 ready to use next year to make up the difference? Or are they ready to cut their household spending back by $7,750 next year? And the year after that, and the year after that?
For some families this might mean cutting out or substantially reducing family vacations for the next 3-5 years. For others it might mean cutting back to a single vehicle to get rid of a car payment and maybe (if it wasn’t highly leveraged) put some money back in the bank as a buffer.
But for other families, who maybe bought in 2019 or 2020 at the top end of their budget and have since had a child (or two) and have seen inflation drive up the basic costs of living far more than their wages, coming up with an extra $500, $600 or $700 per month might just be impossible.
For all of these mortgage borrowers, the future is coming. These big increases in monthly mortgage payments are going to happen. We need everyone with a mortgage to start thinking like the ants and begin planning now for the higher payments that are coming.
Of course, the implications of this go far beyond mortgage borrowers and their immediate families – this will affect every business that sells the products or services that those families buy. Restaurants, entertainment venues, tourism, non-essential retail, vehicle sales, etc are all going to see revenues fall as these families cut spending everywhere else in order to make the mortgage payment each month. And as revenues fall, we will start seeing the demand for labour ease and possibly even an increase in unemployment. This is the future that is coming for all Canadians, and we all need to start thinking like the ants now and be building up our reserves for some lean times ahead.
The good news is that when we start seeing a substantial economic slowdown the Bank of Canada has lots of room to start cutting rates to ease the pain and achieve a soft landing. However, between now and that eventual easing, high interest rates are going to weigh heavily on all mortgage holders and on the wider economy. It will be challenging for even the well prepared ants, but for those who’ve played the grasshopper and have not planned for the leaner times, the next 2 years are going to be full of hunger and hardship.
If you have a mortgage that is renewing in the next 2 years and you’re unsure what to expect for your next term payments, we offer complimentary renewal appointments. We are happy to do some quick calculations to let you know roughly what payment amount you should expect for your next term so you can begin planning now. Give us a call at 250-331-0800, schedule an appointment yourself or send us a message and we’ll get back to you.
Please act like the ants and start preparing now. A cold winter is coming.
