How homeowners can avoid a 'huge' mortgage renewal shock

The Bank of Canada says about 60% of Canadian mortgage holders renewing this year and in 2026 will face payment increases, and a prominant Toronto-based mortgage broker and expert is urging homeowners not to wait until they receive a renewal letter before contemplating what their new payments might look like. 

Lea Zlatkin, licensed broker and LowestRates.ca expert, said advance planning is an essential part of navigating a renewal process that's become stressful for many owners. 

“Many Canadians wait until they receive their lender’s renewal letter to figure out what their new payments will look like,” she said in a new analysis. “By then, options are limited, and the payment increase can be a huge shock.”

Conversely, homeowners with variable-rate mortgages with variable payments could see their payments decrease by an average of 5% to 7%, as these payments have already peaked during the recent interest rate cycle.

Early planning essential

The Bank of Canada’s analysis, based on an enhanced dataset tracking outstanding mortgages, assumes interest rates will evolve according to financial market expectations and that borrowers will renew into similar mortgage products.

Zlatkin recommends homeowners begin planning four to six months before renewal. Key preparation steps include modelling worst-case scenarios, evaluating cash flow impacts, and gathering necessary documentation early.

“To prepare, calculate what your payments would look like if rates were higher by 15% to 20%, helping you understand the potential increase and how it will affect your budget,” Zlatkin advises.

Managing payment increases

The Bank of Canada's latest analysis on mortgage renewals found that borrowers facing increases will see their mortgage debt service ratio rise by a median of 2.7 percentage points, from 15.3% to 18.0%. However, several options exist to manage higher payments.

Approximately half of borrowers facing increases could eliminate them by extending their amortization by five years. Many homeowners have also built equity that could provide access to additional borrowing through home equity lines of credit.

The Bank of Canada notes that most borrowers should face interest rates below their original stress-test levels, which were set at least 200 basis points above their contract rate.

Income growth provides relief

Many mortgage holders will likely have seen income increases since origination or previous renewal, which should help manage higher payments. The analysis assumes stable labour markets and other economic conditions.

“Homeowners often make the mistake of assuming they’ll qualify for the same mortgage they had before, but that may not be the case when rates have changed,” Zlatkin warned. She emphasized the importance of consulting with mortgage professionals early in the process.

The Bank of Canada noted that while some borrowers will face challenges requiring spending adjustments, upcoming renewals are not expected to cause severe financial stress for most affected homeowners.

CMP

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