The ticking time bomb of Canadian mortgages

If you bought a home during the pandemic, you weren’t alone; 1.4 million Canadians did the same. With mortgage rates at record lows, you may feel pretty lucky to be watching all of the increasing housing drama from the comfort of your already-moved-into living room. But before you drizzle any more butter on your popcorn, remember there could be some drama in store for you, too — just as soon as it’s time to refinance.

The Bank of Canada issued a somewhat terrifying warning this week, estimating that households that took out five-year term mortgages in 2020-1 could see monthly payments grow by as much as 45% in 2025-26.

How does that work? Here’s an example. Say you bought a home in Winnipeg for $400,000, put 10% down, and got a typical Canadian mortgage: a five year fixed-term at 2.5%. Right now, your payments would be about $1,600 per month. When that mortgage goes up for renewal, however, if your new rate is 4.5% (the median rate BoC predicts mortgages will renew at) those payments would be $2,000 — a jump of 25%.

The scariest part of this little financial fable? That 4.5% rate is a somewhat conservative estimate. BMO senior economist Robert Kavcic pointed out that the last time the five-year bond yield was at this level in 2008, five-year fixed mortgage rates were above 5%. It’s smart to start planning for that increase now (which of course is easier said than done). With the astronomical increase in home prices during the pandemic, many Canadians had to stretch themselves to the limit to afford one, and now many will be asked to stretch even more. It’s too soon to say what greater effects this will have on homeowners and the economy as a whole, but it’s probably wise to keep an eye on that ticking clock.