Since early 2022, the Bank of Canada (BoC) has taken aggressive steps to curb inflation through a quantitative tightening (QT) campaign. This involves raising interest rates and reducing its balance sheet, primarily filled with government bonds, corporate bonds, and mortgage-backed securities.
As of today, the BoC has increased interest rates to levels not seen since before the global financial crisis, hiking the overnight policy rate by 500 basis points to around 5%. These moves have driven Canadian mortgage rates and bond yields significantly higher. The conventional 5-year fixed mortgage rate has hovered around 6% for the past three months, nearly double the rates seen during the housing boom of 2020-2021.
How Rising Interest Rates Affect Canadian Homeowners
A report from the Canada Mortgage and Housing Corporation (CMHC) indicates that approximately 2.2 million Canadian mortgage holders will face an “interest rate shock” when they renew their mortgages at much higher rates. This represents about 45% of all outstanding mortgages, totaling more than $675 billion.
In the first half of 2023, nearly 300,000 fixed-rate mortgage borrowers faced this financial challenge. CMHC researcher Tania Bourassa Ochoa noted that mortgage payments could increase by 30% to 40% depending on the original interest rate and the current refinancing rate.
Refinancing Options Amid Rising Mortgage Rates
If you're feeling the pinch from rising interest rates, here are six refinancing strategies to consider:
1. Breaking Your Mortgage
While breaking your mortgage to refinance might seem like a quick solution, it can result in hefty penalties and additional costs. Be cautious if you have a low first mortgage rate locked in for several more years.
2. Adding to Your Current Mortgage
Many lenders offer the option of adding new components to your existing mortgage. This can be a good way to access funds without disturbing your low original mortgage rate.
3. Second Mortgage
A second mortgage can be an easy way for homeowners to access equity, but interest rates can be high. Borrowers with excellent credit may still face rates as high as 10%, with extended amortization periods up to 40 years.
4. Prime HELOC
A Home Equity Line of Credit (HELOC) is a popular method to tap into your home’s equity. With prime rates ranging between 7% and 10%, homeowners can borrow up to 80% of their property’s value.
5. Non-Prime HELOC
If you don’t qualify for a HELOC from a prime lender, you may consider a non-prime HELOC. These often come with higher interest rates and fees but offer more flexibility in debt servicing.
6. Blend and Increase
The blend-and-increase option lets you combine your current mortgage rate with a new interest rate, resulting in an averaged rate for the loan.
The Financial Pressures of Higher Rates
While delinquency rates on mortgages remain low, more households are falling behind on other forms of debt, such as credit cards and car loans. As pandemic-era mortgage rates expire, more Canadian households will face significant increases in their monthly payments.
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