That is what the Bank of Canada stated is a possibility a few weeks back at press conference.
Mortgage payments could rise by 45% around 2026.
Let me ask the title of this post a different way;
Will your mortgage interest rate triple?
If it does, then yes.
That’s the math.
If rates triple, then payments increase 45%.
Let’s dive deeper, using 2% as a starting rate, because that’s who the Bank of Canada is worried about – those in the below 2% range that bought in 2021 and are now facing upward pressure on payments.
If rates double, to 4%, the payment rises ~25%
If rates triple, to 6%, the payment rises ~45%
That’s a technique called ‘anchoring’, where one number is set that is way out there (45%), and in turn it makes the real number seem more palatable. It’s a behavioral finance term. Google it and learn more. It’s something the BOC is also doing… clever isn’t it?
Enough about the headlines and clever marketing, let’s talk about reality.
Let’s talk about two things headlines and the news stories almost never cover.
Real math.
Real money.
So here’s a few very real questions no headline is asking;
Are you making 1.5% more than you did in 2021?
Are you making 6% more than you did in 2019?
Will you average a 1.5% raise per year over the term of your mortgage?
Because 1.5% pay increase = 25% = Rates doubling
Yes, a 1.5% annual raise, covers a 25% mortgage payment increase 5years later, triggered by the interest rate doubling.
Next question;
Will you average a 3% pay increase in gross household income over the 5yrs to renewal time?
Because 3% = 45% = Rates tripling
Yes, a 3% annual raise, covers a 45% mortgage payment increase 5years later, triggered by the interest rate tripling.
Look at the math…
You’re making $100k per year right now and current mortgage balance of $500,000 is costing you now $1012.21 bi-weekly accelerated based on a 30 year amortization and a variable rate of 2.7% (discount of 1%) when you started it in June 2021.
Fast forward to 2026 when your mortgage renews (assuming you’ve made no extra payments and just did a bi-weekly accelerated payment) your new payment will be as follows:
Balance at maturity June 2026 – Approximately $431,000
Interest Rate: 6% (tripled from 2021)
New Payment: $1462.67 based on 6% at 22 year amortization (at renewal)
Difference in between payments= 450.46 bi-weekly or 900.92 monthly increase.
Now, am I saying a $900.00 increase to the monthly payment on a $500,000 mortgage isn’t a big deal?
I say to that a big whopping NO!
That’s real world dollars, real math, and a real action plan that needs to be considered.
If you’re worried that your 2% rate from 2021 is going to become 6% tomorrow (2026), then you need to average 3% more gross household income per year, every year, to cover that off.
$100k x3% =$3,000 x 4 years until renewal = $12,000 more household income at renewal.
Difference in payments at renewal from today $900.92 Month x 12= $10,811 annual difference
Key Point; at renewal that 500K mortgage is knocked down to ~431,000 – that’s a $69,000 reduction in debt, or a $69,000 increase in equity.
A $69,000 increase in your net worth, never mind the increase in your property value – which 4 years or so from now will also be a real thing.
If you, like me, are in a variable rate mortgage – today’s headline drama might have you up at night if you keep watching daily.
And let me be the one to tell you there is probably another possible BIG rate hike coming to follow the US announcement of .75% increase (biggest since 1994) last week.
The BoC announcement is due July 13 and if they decide to follow the US, the overnight rate will push the Prime rate to 4.45%.
Factor in your 1% or so discount you are still in a very competitive rate (3.45%) on a variable as opposed to a 5%+ fixed rate for 5 years if you locked in now.
Remember: all of us qualified at 5.25%, even when our contract rate was say 1.45%, still 5.25% stress tested.
And after the last three hikes many of us are at just 2.5 – 2.7%, less than half the qualifying rate used for approval.
This suggests to a thinking person that… we will be OK.
Do we like paying more?
Of course not.
But… can those who qualified for adjustable rate mortgages over the past 6 months, or 4 years, afford to pay more?
Yes.
Yes they can.
There’s a lot to not like about what’s happening right now, the new words alone are a bit much…
Stagflation. Inflation. Shrinkflation
Financial vocabulary that never really mattered before, now suddenly important for us to know.
As for inflation – this one we get.
Things are costing more.
The US sneezes and we catch the cold as they say, and what was the news out of the US earlier this month?
Inflation at 8.9%
Gas up 49%
Grocery up 11.9%
Electricity up 12%
Rent up 5.2%
Will Canada’s number follow?
Probably, we are followers…
But, what do we know about Canada today, as in ‘this news just in’?
That we’ve hit another all-time high for employment.
Good news right?
Who knows anymore…
135,400 new full time jobs
95,800 fewer part time jobs… hopefully the part-timers became full time.
A net gain of 39,000 people employed full time over 30 days.
Wow.
And hey, inflation’s not just limited to the cost of goods, wage inflation is a real thing too – the cost of people, is also running at 3.9%, up from 3.2% in April.
Hang on though….there’s that 3% we needed earlier.
3% = 45% = Rates tripling
The (general) wage math is on track to cover a tripling of interest rates.
Interesting.
See… it’s all not doom and gloom that you are reading in the news
OK not exactly, but keep in mind.
As Canadians we are paying our mortgage down at an all-time record rate!
At renewal your 22yr amortization can be extended back out to 25, or very likely 30yrs if need be – which offsets any big interest hikes in an equally big way.
E.g. triple the rate, or re-extend to 30yrs – and it’s becomes just a 22% increase in the payment.
And if things got really bad, would we see the gov’t bring back a 35yr option?
Yes, we should see that now in fact, it’s overdue.
What about if rates come back down due to the big R word (recession) takes hold and your payment comes back down again? That is the why we look to variable, savings on the way up and the way down and overall average out better in the long term. (see the graph below but keep reading first)
And lastly for all the talk of ‘highly indebted households’… it’s not homeowning households.
Since Jan 1, 2018 it’s a different buyer, due to the stress test.
Today’s homebuyer has very little consumer debt. They have amazing credit, great income, a solid down payment, and are on a record setting pace to pay down their mortgage balance thanks to rock bottom rates and cash socked away during the pandemic.
As for those coming up for renewal today, they’re barely seeing a 1% rate increase, because back in 2017 fixed rates (see below) were at 3.79%. In fact speaking of rates, now have a look at this graph below and remember the phrase…
“..the trend is your friend”
Rule # 1 in mortgage world; Life is variable and your mortgage should be too.
Also, it’s all going to be OK
Smile, breathe, relax, turn off the news, put your phone down, go for a walk.
Better yet invest.
Invest in what you say?
People are always asking me what is the best returning investment I might know of being in the ‘business’. The real answer isn’t an investment property, or crypto, or tech stocks.
It is you.
You are the only investment that has an unlimited return potential, that compounds, where you have control of the outcome. So if you are struggling with where to spend and invest your time and money, choose yourself in these times.
Take a course on something that has always interested you. My favourite site is Udemy.com. Try a new sport/fitness regime that will push you out of your comfort zone. Get stronger, wiser, more prosperous.
No one can ever guarantee investment returns but I can guarantee if you:
- Learn + Take Action + Repeat the process = You win
Find that side-hustle and crush these possible increases and you might just find a new opportunity you never knew of that rewards you and your family in ways you never dreamed of.
Learn to work harder on yourself than you do on your job. If you work hard on your job you can make a living, but if you work hard on yourself you’ll make a fortune.”
― Jim Rohn
In the end everything will be OK, and if it is not yet OK, that’s just because it is not yet the end.
YOU are the only variable.
Hang in there.
Stay positive.
Stay curious.
Stay open to new possibilities
Stay variable.
