Interest rates expected to stay higher for longer. What that means for your mortgage

Borrowers with fixed rates are expected to see an average payment increase of between 14% and 25% next year compared with early 2022 costs, according to the Bank of Canada

From ultra-low interest rates that led to a huge spike in real estate demand to the speed with which interest rates shot up to levels not seen in a generation, it’s been hard to keep up with the shifting landscape for mortgage holders.

Now, with interest rates increasingly expected to stay higher for longer, many of the homeowners who locked in low rates years ago are likely bracing themselves for financial pain as their mortgage comes up for renewal.

“Each month that passes, roughly two per cent of mortgage holders face renewal at sharply higher interest rates,” Royce Mendes, managing director and head of macro strategy at Desjardins, wrote in a Sept. 19 note to clients.

Borrowers with fixed rates are expected to see an average payment increase of between 14 per cent and 25 per cent next year compared with early 2022 costs, according to the Bank of Canada. In 2025 and 2026, payments should rise between 20 per cent to 25 per cent.

Those with full variable rates have already taken on the burden of higher rates, seeing their payments rise an average of 49 per cent as of this year.

Borrowers with variable rates but fixed monthly payments will face the greatest increases ahead as some have had their payments only cover the interest costs, or not even that. People with these products face an expected 44 per cent average rise in payments by 2026 as their mortgages reset.

Peter Routledge, head of Canada’s banking regulator, warned in September that this category of borrowers, which total about $369 billion of the $2.1 trillion of outstanding mortgage market, are “at risk of suffering a significant payment shock,” and that he hopes to see the option offered less.

Given the steep rises in payments, banks and other lenders have been responding in part by stretching out amortizations to reduce monthly payments.