How to Prepare for Higher Mortgage Payments

Wahi speaks to financial experts to see what homeowners can do to get ready for larger monthly mortgage repayments when renewing their loans.

By Josh Sherman | 4 minute read

Interest rates have been steadily rising over the past year, so homeowners with fixed-rate mortgages in Canada might want to begin planning for higher monthly repayments upon renewal.

Rising interest rates have already been causing headaches for some mortgage borrowers, but many have been sheltered from higher monthly payments — for now.

Of the 35% of households in Canada with mortgages, more than two thirds have locked in a fixed-rate, meaning fluctuations in the Bank of Canada’s overnight rate don’t have an immediate effect on their repayments.

However, even these fixed-rate borrowers aren’t spared come renewal time. As the most common term for these loans is five years, the clock is ticking. More and more Canadians holding fixed-rate mortgages are facing the prospect of much higher monthly housing costs. “Over the next few years, we will experience the greatest quantity of mortgage renewals in Canadian history so it’s natural for people to be thinking about what their budgets will look like once their payments reset,” Bekim Merdita, executive vice president of Rocket Mortgage Canada, tells Wahi.

“Homeownership is a long-term investment. Rate cycles will always be a reality of the homeownership journey and do affect people in the short term,” Merdita adds. To help homeowners prepare for higher rates, Wahi turned to financial experts, who provided five tips: 

1. Run the numbers 

“The best place to start preparing is first understanding what that increase could be,” says Merdita. “For example, on a $300,000 mortgage balance the payment is approximately $400 higher per month at a 5% rate than at 2.5% rate,” he says by way of example.

Explore a range of scenarios, not just the one you’d be confronted with if your renewal date were next month, suggests Anita Bruinsma, founder of Clarity Personal Finance. “Then you have at least a sense of how much higher your payment is going to be — so that is step one,” says the self-described “financial coach” who has a chartered financial analyst (CFA) designation. 

2. Track your spending 

“Canadians should be looking at their available cash flow and expenses today to ensure they’ve prepared their budgets for the increased payment,” Merdita recommends.

In Bruinsma’s experience, lots of homeowners are unaware of exactly how much money they’re spending. “Generally people underestimate how much their life costs on a year-to-year basis, and they can be really shocked when they see the real number,” she tells Wahi. “I encourage my clients to go back six to 12 months — 12 months is best — and look at all of their spending and categorize it so that they know exactly how much their life is costing,” she adds.

Also consider how future plans might impact your finances and ability to absorb higher interest rates. Perhaps you’ll need to pay for childcare next year, for example. “It’s a lot of forward-looking planning as well as looking back at what you’ve been spending,” Bruinsma says. From there, mortgage borrowers should prepare an annual cash-flow statement, which includes all your income minus taxes and other expenses, to see where their household stands.

3. Reduce expenses  

If it looks like you won’t be able to shoulder a rate increase under current circumstances, it’s obviously time to mull cutting back on certain expenses. When doing so, think big. “There could be the small expenses, but it’s kind of better to look at the big ones,” Bruinsma explains. In the past, some of her clients have decided to get rid of one of two cars. “Of course, vacations would be another big one,” she offers.

4. Consider other options  

If you can’t find enough savings, other options do exist. “It really depends on the individual person. Some people have very few options, and some people have a lot of options,” says Bruinsma.

• Try to extend your amortization at renewal: “It’s not my favourite approach, because you’re just kicking the can down the road, of course, and you’re just going to be paying more interest,” says Bruinsma. “But for someone for whom they cannot find a place… to cut to make their payments, it’s definitely legitimate.”
• Tap into your savings: “Listing out all of your savings, figuring out what all of your savings are earmarked for, and then deciding whether you could put a lump sum payment on your mortgage at renewal… that’s another idea,” Bruinsma suggests. 
• Consolidate your debt: “If someone has a high level of debt, it might make sense to consolidate it by adding it to their mortgage at renewal,” she explains. “The rate on a mortgage will almost always be lower than a rate paid on credit cards and unsecured lines of credit,” she adds. However, this approach does complicate the renewal process. In fact, be prepared to begin the mortgage approval process again. 

5. Don’t wait  

Whatever course of action you take, you can’t afford to wait. Sometimes, people put their heads in the sand when they’re facing an expected financial challenge, Bruinsma suggests. However, this only makes the situation more difficult and can turn a solvable problem into a much bigger issue. “If you see that you’re going to be stretched, you cannot wait until a month before your renewal to do all this work,” she says. “Doing the work ahead of time and being prepared is super important.”