Latest interest rate hike has mortgage holders living in uncertainty, rebudgeting

Last week, Canada's central bank raised its interest rate to 4.25 per cent. Now, many people in Saskatchewan are worried about renewing their mortgages under the new rate.

Canada's five biggest banks moved swiftly to match the bank's increase, raising their prime lending rates by the same 50 basis points. 

"For folks who do have to renew their mortgage, it's going to make a big difference probably in how much they pay in their monthly payments due to much higher interest rates," said David Macdonald, senior economist with the Canadian Centre for Policy Alternatives. 

"It'll likely mean a doubling for most people in terms of the interest portion that they pay."

Ryan Boughen, a mortgage broker with The Mortgage Group in Regina, says he's been getting calls from people who aren't his clients who are checking to see whether he can recommend something better than their financial institutions are offering.

"What I think people are generally looking for is: 'Can I lock into something lower or what can I do? Is there anything I can do to reduce my payments?' And, unfortunately, the short answer is probably not," Boughen said.

According to the mortgage broker, anyone who took out a new mortgage five years ago will be looking at a rate increase of around two per cent when it comes time to renew.

As an example, Boughen offered the case of one of his clients whose mortgage amount was around the average $300,000 when they bought their house. 

"So, five years ago, monthly payments would have been a little bit under $1,450 a month. Now, with rates being almost two per cent higher than that, that payment is going up to about $1,750 a month as soon as a renewal happens," Boughen said.

He says he has clients who have been at a 2.5 per cent interest rate for many years. Now, they are seeing their interest rate double and their payment will go up about $400. 

Boughen says many of his clients are resigned to the higher payments. 

"Interest rates have been in the news so much since earlier in the year that at least it wasn't a surprise that rates were way up," he said. "But when you look at the dollars and cents of it, it is still a very big adjustment and I think generally people know that they have to figure out a way to deal with it. 

"It comes as a shock initially. But realizing that there's no other choice because their mortgage costs are coming up, people [say] 'home gets paid for first and then we figure everything else out.'"

This means cutting back on saving money and discretionary spending in order to make ends meet.

Future mortgage renewals 

People who don't need to renew their mortgage soon will be spared for now, Macdonald says, but that's cold comfort for some.

Lillian Findlay, a single parent in Saskatoon, says she's not a mortgage renewal for another year, but she's still struggling to keep up with monthly payments. She says she's been living paycheque to paycheque because of the rising cost of living. 

"It's at the point now where I'm going into credit card debt and taking out lines of credit to pay for normal things," Findlay said. "And it's sort of, if I miss a payment I'm scared. Like, I'm scared that I'm not going to be able to recover if I have a bad month or two or if I was to lose my employment.

"I don't know what I would really do at this point," Findlay said. 

Justine Hickey of Regina used money from her father, who died, to put a down payment on her home when the housing market was in a good spot in 2020. 

"The biggest thing I'm worried about is just not knowing what's gonna happen," Hickey said.

Despite not having to renew her mortgage for three years, Hickey is worried about possible future financial issues. 

"I'm hoping that I can continue to save money, keep up with repairs in my house. I can basically do one repair a month. If two things break at once — when both my washer and dryer break — I have to wait two months for that kind of thing, so who knows what would happen if my mortgage rate goes way higher."

Why raise the interest rate?

Canada's central bank has raised its rate seven times this year in its fight to wrestle inflation into submission. In the process, the bank has taken its rate from functionally zero to its highest point since 2008 — its fastest pace of rate hikes since inflation targeting began in the 1990s. 

"It takes a while for these higher interest rates that we've been seeing frankly for the last six months to start to hit most consumers in a substantial way," Macdonald said. 

Macdonald says the the goal of these higher interest rates is to cause consumers and businesses to spend less, and one of the likely results of that is a recession.

"And if we did see a recession and it did start to draw down inflation, then it may well be that a year or two from now and people have to renew that interest rates are lower again, maybe not as low as they were last year, but they may well be lower."

People such as Hickey who likely locked in a fixed rate mortgage in the 1.5 per cent range during the peak of COVID are going to be in for a painful adjustment.

With the current rate, that could boost the monthly payment by $550, Boughen says.