Half of Canadians need to refinance their mortgage this year, just as rates rise

It’s a big year for Canadian homeowners who are renewing their mortgages.

Nearly half, or about 47% of existing mortgages, need to be refinanced this year, writes Ian Pollick, head of North American rates strategy at Canadian Imperial Bank of Commerce. That compares to an average year where anywhere from 25% to 35% are refinancing.

First, we need to look at why this is.

Five-year fixed mortgage rates began a steady tumble in 2008, slipping from about 6% to below the 3% mark in mid-2012. If you had applied for a mortgage in the previous years, this was a really good time to refinance.

Five-year mortgages are the most popular terms in Canada. Speaking to a few mortgage brokers, they say that many Canadians opted to refinance back then to take advantage of better rates. The end result is five years later, all those mortgages are coming up for renewal.

But while rates are higher now than they were at the lowest point in 2013, they’re not that much higher.

Looking back at our data, the lowest rates that consumers were being quoted on our website for a five-year variable closed mortgage was 1.85%. Today, it’s 2.13%. It should be mentioned these rates are only for those with high ratio mortgages — if you put down less than 20% for your down payment.

On the fixed front, the difference is even smaller — 2.54% back then versus 2.99% now.

Of course, it’s hard to say what kind of rates Canadians who are refinancing this year were paying on their previous term. Some may be refinancing on one or two-year terms. Last year, we saw record low mortgage rates, with a closed variable of 1.69% being offered in Ontario.

But, let’s demonstrate the difference between the lowest rate in 2013 (1.85%) compared to the lowest rate today — 2.13%.

Let’s a homeowner has a mortgage of $400,000. At 1.89%, with a 20-year amortization, you’re paying $2,026 a month.

If your rate goes up to 2.13%, your monthly mortgage payment is up to $2,076. That’s $50 a month more, or $600 a year more.

Of course, this example isn’t necessarily representative of what’s going on out there. You’re probably not going to be offered 2.13% on a refinance, as that offer is currently for those getting a new, high-ratio mortgage.

But it reinforces that mortgage rates right now, especially those being offered by brokers, are not significantly higher than they were five years ago. The majority of Canadians refinancing this year will still find rates pretty accommodative.

What happens in subsequent years, however, will deserve close watching.

Multiple studies have shown Canadians don’t have a lot of wiggle room when it comes to monthly expenses. Debt levels are at record highs, and sizable moves in interest payments could push an increasing number of Canadian households into delinquency.

That fact is no doubt weighing on the Bank of Canada, which sounded very cautious on future rate hikes in its most recent announcement. The bank is caught in a tough spot, as the Canadian economy is performing well, but Canadian households have little to no ability to handle higher interest rates.