The Canada Mortgage and Housing Corporation (CMHC) estimates that 1.2 million fixed-rate mortgages will need to be renewed in 2025. This represents the colossal sum of some $300 billion.
From fall 2020 to March 2022, it was possible to negotiate a mortgage below 3%.
Today, after a tough negotiation, we are very happy if we get away with an average mortgage rate of 5%.
How much more?
Concretely, how much more will paying the mortgage cost?
Per $100,000 of mortgage, amortized over 25 years, the monthly payment will increase from $473.25 to $581.60, an increase of $108.35 per month. Over 12 months, the mortgage payment increases to $6,979, or $1,300 more.
In the case of a mortgage of $300,000, your monthly payments will increase from $1,420 to $1,745. Over 12 months, the “mortgage bill” will increase to some $20,937, for an additional outlay of $3,900.
It could have been worse
That said, it could have been worse.
Why is 5% currently a good mortgage rate? Because just a few months ago, the average mortgage rate was around 6.5%.
Since then, mortgage rates have fortunately fallen in the wake of the Bank of Canada’s major reduction in the key rate, which fell from 5% to 3.25%.
Towards further declines?
But, will mortgage rates fall further?
If the forecasts of financial analysts materialize, borrowers will indeed be able to benefit over the coming quarters from a reduction in interest rates.
This will depend on the upcoming decisions of the Bank of Canada.
Analysts predict that our central bank will cut its policy rate by another percentage point by the end of 2025. If so, the policy rate would fall to 2.25%.
What would be the impact on mortgage rates? These could fall by at least another half a percentage point.
Is the variable rate appropriate?
Furthermore, is the variable rate mortgage a good option?
When you opt for a “variable 5-year mortgage”, the interest rate on your mortgage will vary from month to month, directly depending on the banks’ prime rate.
The “official” prime rate is calculated as follows: a premium of 2.2 percentage points is added to the Bank of Canada’s key rate.
From December 2020 to March 2022, when the Bank of Canada’s key rate was 0.25%, the prime rate was 2.45%.
At the start of 2024, when the key rate stood at 5%, the prime rate stood at 7.2%.
Currently, with a key rate of 3.25%, the prime rate has therefore fallen to 5.45%.
Note about the prime rate: instead of adding 2.2 percentage points to the prime rate, most large banking institutions generally “just” add 2 percentage points
In light of the evolution of the Bank of Canada key rate and the prime rate, a 5-year variable mortgage has proven to be rewarding since the peak of rates in 2023 and early 2024.
On the contrary, borrowers who had opted between December 2020 and March 2022 for the variable rate mortgage were subsequently fleeced due to the sharp rise in interest rates.
During this period of low rates, it was better to opt for a fixed rate mortgage for at least 5 years.
Today, people who hold a 5-year variable rate mortgage will benefit from it at least until the end of next year because the key rate will continue to fall.
But from 2026, it will be less obvious because rates could start to rise again.
Are you renewing your mortgage?
Estimate your monthly payments using our mortgage calculator tool.
The Journal has developed an essential tool to know your mortgage payments and the interest/capital payable. Are you curious to know how much you will pay depending on the frequency of payments? Do you want to make a comparison with two different interest rates? Try our mortgage calculator tool to get the answers at: www.jdem.com/hypotheque
