Preparing For Mortgage Renewal Shock In 2024

Mortgage rates may have peaked, but the threat of mortgage renewal shock still looms for many homeowners.

In 2024 and 2025, 2.2 million mortgages — 45% of the country’s outstanding mortgages — will be up for renewal, according to the Canada Mortgage and Housing Corporation[1]. Homeowners renew their mortgages all the time, but today’s elevated mortgage rates make doing so costlier than usual.

In May 2019, the average interest rate for insured fixed-rate mortgages with terms of five years or more was 3.21%[2]. In May 2024, the average was 4.9%. Paying an additional 1.69% on a $400,000 mortgage would increase a borrower’s monthly mortgage payment by almost $370 dollars.

Renewing your mortgage in the next 18 months will likely put pressure on your finances. Understanding a few key details of what a mortgage renewal currently entails can limit renewal shock and create an opportunity to find the ideal mortgage for your next term.

Mortgage renewal rates: What can you expect?

If you haven’t received a renewal offer from your lender yet, you’re probably wondering what your renewal rate will be. That’s a tough question to answer accurately, but a little data can provide some context.

Large banks tend to base mortgage renewal rates on their posted mortgage rates, which can be quite high. The average posted rate on a five-year fixed-rate mortgage at Canada’s chartered banks was 6.79% as of July 12, 2024[3].

You should never pay a bank’s posted rate, though. Assuming you’ve made your mortgage payments on time and are in good financial shape, your lender should be willing to negotiate. You might eventually be offered a rate more in line with their discounted rates. Five-year fixed rates are currently well below 5%, while three-year fixed rates are still closer to 5%.

It’s difficult to estimate where rates will be in the coming months. Fixed mortgage rates are determined by bond market activity, which can be unpredictable. Variable mortgage rates are set for further declines, but the speed of those declines depends on how enthusiastically the Bank of Canada reduces its overnight rate. Three quick cuts would reduce variable rates by at least 75 basis points by the end of 2024.

Mortgage renewal tips

Here are three strategies for getting a better deal on your mortgage renewal.

Shop around

It generally takes minimal effort to renew with your current lender, but if their initial renewal offer includes a painfully high rate, exploring other lenders could save you a lot of money.

Comparing mortgage offers doesn’t take much time. Type “mortgage renewal rates” or “current mortgage rates” into Google, note the most appealing rates and reach out to the lenders or brokers who provide them.

If you do decide to renew with a different lender, know that you’ll have to go through the application process again and qualify for a new mortgage. Requalifying shouldn’t require any more effort than the initial mortgage process. Don’t let the idea of switching lenders at renewal intimidate you.

Use your prepayment privileges

One path to a more affordable mortgage is by making a larger down payment and borrowing less. You can apply the same logic to a renewal by paying off as much of your mortgage as possible prior to starting your next mortgage contract.

Many lenders allow you to prepay a certain amount of your mortgage each year by increasing your monthly payment or by making lump-sum payments. If this is part of your mortgage contract, and you have the cash available, a prepayment could help make your renewal more manageable.

Nerdy Tip: Understand your lender’s prepayment limits and the penalties you may be charged for exceeding them. Some lenders, however, allow you to make principal prepayments of any amount at renewal time.

Re-amortize

Extending your amortization period at renewal can result in smaller monthly payments and make your mortgage more affordable — in the short-term, at least.

Over time, however, re-amortizing can be a risky strategy. It can generate years of additional interest charges and potentially cloud your financial future. If re-amortizing means paying off your mortgage when you’re 60 instead of 55, for example, it could impact your retirement plans.

Let’s assume you have 15 years left on a mortgage worth $350,000. Opt for a five-year fixed term at a renewal rate of 5.5% and your monthly mortgage payment would be $2,848. If you extend your amortization to 20 years, your monthly payment would be $2,395.

When you pay off your loan, you’d save almost $500 per month — but pay $254,889 in interest. With a 15-year amortization, your total interest cost would be $162,693 — over $92,000 less.

To avoid the extra interest, you could extend your amortization for a single term and return to its original length the next time you renew. Doing so could give you a few years of relief. However, your payment will still increase when you eventually trim your amortization period, so you’re really just delaying the mortgage renewal shock you’re currently trying to avoid.

Nerdy Tip: Consult a mortgage professional to find the renewal strategy that’s right for you. Understanding your options, and their long-term impacts on your finances, can help you make a more confident decision.

Good news: Some renewals may skip the stress test

On November 21, 2023, the federal government announced a new Canadian Mortgage Charter as part of its Fall Economic Statement [1]. The charter includes a reminder that homeowners with insured mortgages are not stress tested when they renew their mortgage with a different lender.

Prior to the government’s publicizing of this fact, lenders had little reason to offer mortgage clients competitive rates upon renewal. Borrowers could choose to accept their current lender’s offer or apply with a new one, a move they feared would trigger a mortgage stress test that would add another 2% to their minimum qualifying rate.

With that risk in mind, borrowers couldn’t be blamed for re-upping with their original lender, even if it meant accepting a more expensive renewal rate.

But with the Canada Mortgage Charter now in effect, the lack of a stress test on insured mortgage renewals should inject more competition into the market and theoretically lead to lower renewal rates across the board. To make the most of this increased choice, you may want to consider working with a mortgage broker, who can help you access and compare a greater number of mortgage offers.