How Vancouverites are dealing with mortgage rate hikes

“Housing in the Age of Inflation” is a Daily Hive feature series where we speak with renters and homeowners in Metro Vancouver about how meteoric interest rate hikes, ballooning rents, and lack of availability are impacting them. Have a story to tell? Email us at [email protected]

West End resident Sajjid Budhwani took the leap into home ownership last year, thrilled he could finally call an ocean-facing, two-bedroom apartment off Davie Street in downtown Vancouver his home.

His mortgage payments are approximately $2,100 per month right now, but when he’s due to renew his fixed-term mortgage in August, he expects his payments will increase to about $3,000 per month now that interest rates are significantly higher than when he bought.

“I’m single. So yes, the burden comes on me,” he told Daily Hive Urbanized. “It’s kind of scary.”

Sajjid Budhwani/Submitted

It’s no secret that owning a home in Vancouver is pricey, and for Budhwani, it required sacrifice, including getting rid of his car. He’s trying to get ahead by paying an extra $800 monthly toward his mortgage right now, in an attempt to batten down his principal before the renewal hits.

Selling is out of the question for him, after all his efforts to buy. He’ll look for a roommate to stay in his second bedroom if the monthly payments become too much.

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“I am very, very firm that I do not want to sell this place,” he said. “I enjoy my privacy, I enjoy living by myself. But I have an extra bedroom… so that could help me cover whatever damage will be done.”

From getting a roommate to extending the time they’ll carry a mortgage, Budhwani is one of many Metro Vancouverites thinking of creative ways to avoid selling their home as interest rate increases drive up monthly payments.

Canada hasn’t seen rate hikes like these in 40 years

Canada’s prime rate now sits at 7.2%. It’s the rate set by the federal government that dictates interest rates at which banks can offer loans, including mortgages. Raising the prime rate, as Canada has aggressively been doing during pandemic recovery, is supposed to help combat inflation.

But rate hikes also make borrowing money more expensive. And for anyone paying off a mortgage financed pre-pandemic when interest rates were much lower, renewing in the next couple of years will likely mean higher monthly payments.

Mortgage holders today are facing the fastest and largest increase in interest rates in four decades, according to the Canadian Mortgage and Housing Corporation. More homeowners will find themselves in precarious financial positions, and the larger portion of household income going toward housing makes the Canadian economy more susceptible to the downturn, it adds.

Borrowers could see a 30 to 40% uptick in monthly mortgage payments, the CMHC warned, and the lion’s share of that shock is yet to come.

About a third of mortgage holders have already seen their monthly payments increase, but another 2.2 million mortgages are scheduled to be renewed in the next two years.

In all, just under half of all outstanding mortgages in Canada stand to jump in 2024 and 2025. CMHC pegs the total dollar value of those mortgages at approximately $675 billion — about 40% of the Canadian economy.

Mortgage broker Rebecca Casey explained to Daily Hive Urbanized there are two types of mortgage rates available in Canada: variable and fixed. Variable rates fluctuate along with changes to the prime rate, but fixed rates are locked in for up to five years. At the end of a fixed term, homeowners renegotiate with a lender for new terms.

Casey cautioned against accepting the first renewal offer that comes in the mail, since it could mean higher than necessary monthly payments in this interest rate climate.

Extending amortization can lower monthly payments

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Lengthening the amount of time a mortgage is paid off can offset payment increases at renewal. People may be worried about extending their mortgage timeline back up to 25 or 30 years, especially if they’re nearing retirement. But Casey said it can be used as a temporary measure while interest rates are high to reign in monthly payments.

“If you’ve only got 20 years left on your amortization, resetting it back to 30 years will buy you a little bit of breathing room,” she said.

At the next renewal, when interest rates may be lower, clients could get back on schedule for their previous timeline with lump-sum payments.

“What we’ve seen over the last little bit is people committing to shorter terms because everybody’s waiting for rates to come down, and understanding this is a temporary period of time,” she said.

Shopping around to different lenders at renewal could also lead to more favourable terms. Casey shared how she got a client a full percentage point lower at renewal recently because the lender assumed the homeowner wouldn’t qualify for a lower rate.

“Assuming you have the ability to move and qualify, especially if you already own your home, chances are your value has increased and there are going to be some good options for you.”

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Family steps in to help

Casey is seeing clients turn to creative methods before considering selling their homes. She’s seen family members, from parents to siblings, supporting homeowners by co-signing or becoming guarantors for mortgages, and even going so far as to buy into their family’s property to become part owners.

Harder stress test adds another hurdle for would-be buyers

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In addition to making finances tighter for homeowners, higher interest rates are making it difficult for prospective buyers to get into the market. Even though asking prices have softened slightly, the income required to buy a home in Metro Vancouver is higher than ever.

That’s partly because of the stress test buyers need to pass to qualify for a mortgage. Introduced by the government in 2015, it requires potential buyers to prove they can afford mortgage payments if interest rates were to increase. Typically, buyers need to show they can handle payments at an interest rate 2% higher than what they’d be paying in real-time.

“For a few solid years there, we were told 5.25%. That was the number. So to jump from 5.25% to, you know, 9%, that’s a huge difference in people’s borrowing power,” Casey said.

But despite all the challenges facing homeowners and prospective buyers right now, Casey remains optimistic that these high interest rates are temporary, and should come down soon. She points to reports that inflation seems to be levelling off, and bond yields that are dropping.

“When bond yields drop, you can expect fixed rates to typically follow,” she said. “We are at a place where the future is going to be more positive.”