How Rising Interest Rates Are Impacting GTA Homeowners

By Josh Sherman | 5 minute read

Robert Everett had to make a tough decision last month. Either he and his wife needed to sell their house in Whitby, or agree to lock in their mortgage rate with their bank for the next three years.

Everett opted for the latter, but the choice was difficult because it means he’ll continue draining his savings to help cover the carrying costs for the foreseeable future. “They (the bank) gave us two options,” Everett, 70, tells Wahi. “We’re screwed both ways at this point,” he adds.

The part-time delivery driver’s financial outlook was very different before last March, when the Bank of Canada began hiking its overnight rate, which impacts borrowing costs, in a campaign to cool inflation (the plan is working, the BoC says). 

About a year ago, Everett’s mortgage rate was approximately 2.25%, and he was planning to purchase an investment property. At such a low interest rate, he’d have no trouble investing while paying down the mortgage on the 2,000-square-foot detached home that he bought with his wife for $725,000 five years ago. 

But, by last month, his variable rate had ballooned to 7%. Locking in at 4.5% brought his monthly payments down to about $2,400 (he pays $1,200, bi-monthly), but that’s still up considerably from the $1,700 he was paying before the rate-hiking cycle began. “It’s a difficult situation,” he says. Everett is not alone. Across the country, similar situations are playing out, stretching wallets and pushing some homeowners to the brink.

Mortgage Payments Are “Skyrocketing”  

“I think people are in trouble,” Elan Weintraub, co-founder and mortgage broker at Mortgageoutlet.ca, tells Wahi. “Mortgages are people’s largest liability and the cost of servicing the debt has essentially skyrocketed,” he adds. 

It’s not just lower-income brackets that are experiencing challenges, Weintraub suggests: “Even high-income people — when your payments go up a thousand, two-thousand, three-thousand dollars, it’s a lot of money.”

To illustrate the impact of higher rates on homeowners, Weintraub provides an example of a $500,000 loan with a 30-year amortization period. 

Early last year, it was possible to secure an interest rate of 1.15%. “Even lower, to be honest,” notes Weintraub. That would peg monthly payments at $1,642.24. At a more contemporary rate of 6%, the payments on the loan leap to $2,974.12 per month.

Locking in Rates  

Higher rates have some homeowners questioning their decisions. 

Lately, mortgage agent Jason Friesen’s phone has been ringing off the hook. Clients who have variable-rate mortgages — these fluctuate with a lender’s prime rate, which itself is influenced by the Bank of Canada’s overnight rate — want to know: should they try to lock in their interest rate today as a buffer against any future hikes?

“I’m taking more and more calls,” Friesen, managing partner at Outline Financial, tells Wahi. “I think the last couple rate hikes we saw really kind of broke the backs of a lot of people.”

Each person’s circumstances and financial situation is unique, but, generally, Friesen says, anyone thinking about switching to a fixed-rate needs to consider the “long-term repercussions” before doing so. “If they’re able to lock into a shorter-term — so a two-year or three-year — it may not be a bad opportunity, depending on how low the rates are,” he adds.
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However, you don’t want to get stuck with a higher rate for a five-year term if the BoC begins trimming rates again, something market-watchers suggest policymakers could start doing in 2024 — or even sooner. “You’re likely not going to be able to get out of that mortgage without a massive penalty at any point in time,” Friesen says of going fixed.

How Are Homeowners Handling Higher Rates?

One Torontonian, who asked not to use her real name for privacy reasons, tells Wahi that her monthly mortgage payments have increased by $750 over the past year. “Everything snowballed so quickly,” says Jillian (not her real name), who works full-time in television. “I never had a chance to get comfortable with one set rate.”

She had secured her current variable-rate mortgage on her one-bedroom condo by the Humber Bay shortly after the BoC’s first rate hike last year. The rate was around 1.75%, and monthly payments worked out to about $1,250 a month. Today, she shells out $2,000 a month to meet her 5.59% rate.

In response, she says, she’s trying to be smarter with budgeting. “I take my lunch more to work,” Jillian explains. “I’m actually cooking more and freezing stuff so I don’t have to necessarily go out as much and [I’m] being conscious of that.” 

Everett and his wife are also changing their spending habits. “We’re just trying to cut back on silly stuff, purchases here and there, just our lifestyle — trim the fat,” he says. Losing his home isn’t a threat right now, but he suggests the couple is in for some uncomfortable times.

Doing admin work on the side for a dance studio has provided an additional cushion for Jillian. “Thankfully, I do have a second part-time job on the weekend for a couple of hours — it helps with that,” says Jillian who has had to forego saving for retirement due to higher mortgage payments.

Despite the higher payments she’s making right now, Jillian says she doesn’t regret choosing a variable rate. Historically, they’re cheaper. They also provide more flexibility, as the penalties for breaking them are lower than those that come with fixed-rate mortgages. “This one, I still feel, was the right decision for me,” she says.