My mortgage payments have gone up by over $1,000. How can I handle much higher monthly bills?

At the height of the real estate frenzy during the pandemic, Briand Melanson felt like a superman.

The variable rate mortgage on its main properties and its investment properties reached a historic low of 1.5%. The monthly payment for his primary residence was around $730 (he bought it in 2010) and his lease payments were around $1,100 (he bought it in 2021).

But now rates are skyrocketing and his variable mortgage payments have skyrocketed, leaving Melanson in dire financial straits.

His properties are both facing mortgage rates of around six percent. That bumped the payment for her primary residence to $1,165 and her rental apartment to $1,775. That means Melanson is now paying $1,110 more per month in mortgage payments for both properties — he’s currently making up the difference for his tenant who has fixed rent for the one-year lease.

« It chokes me up, » Melanson says. « It’s more suffocating than I thought. »

To help cover the extra costs, he put a damper on his social life; no concerts, hockey games, restaurants, drinks or cinemas. As a musician who likes to be with friends, it’s a blow.

« I have practically no life, » he says. “Fortunately, my income is still high, but I am very conservative when it comes to financial stability. If interest rates rise significantly, I give up everything else to avoid filing for bankruptcy.

It’s increasingly common for homeowners to adjust their lifestyles to accommodate rising mortgage payments, says Ralph Fox, broker of record and founder of Fox Marin Associates.

And rising mortgage payments are adding to inflationary pressures, which are driving up the cost of groceries and energy bills.

« People are being hit on all sides right now with rising costs, » he said. “But the last thing you want to do is sell your house. So you cut costs everywhere else.

For Fox, which has several properties with variable-rate mortgages, that means pausing vacation plans in 2023. Many of its customers are cutting back on discretionary spending, such as memberships, subscriptions, food and entertainment.

It’s a first step for owners who are feeling financial difficulties, says Janet Gray, financial planner at Money Coaches Canada.

“People really need to cut back,” she says. Often, reducing discretionary spending can help pay for additional mortgage costs.

An emergency fund also comes in handy during times of inflation and high interest rates, Gray adds.

“People think an emergency fund is when you lose your job, but that’s not always the case. It can be used at times like this to help increase mortgage payments.

If homeowners or potential buyers don’t have an emergency fund, it’s best to start saving right away, Gray says.

And, if homeowners are still struggling to make their mortgage payments after cutting back on discretionary spending, it’s time to talk to their lender, she says.

« Don’t default if you don’t have to, » Gray says. « It’s a big red flag for the bank if you miss a payment or two. »

Leah Zlatkin, a mortgage broker and expert on the rate comparison website LowestRates.ca, is starting to see more flaws on the realtor’s MLS (multiple listings service) site, which shows whether a lender or bank sells a house – when a house defaults the transfer of ownership goes to the lender, who then sells the property.

Faults are rare, but Zlatkin has noticed a few faults popping up every month since late fall.

« If people have been buying during the pandemic, it’s exceptionally difficult right now, especially for first-time home buyers who are already struggling financially to buy their first property, » she said.

The Bank of Canada could raise the overnight rate further, pushing interest rates higher in early 2023 to bring inflation back to its 2% target – inflation has remained stubbornly high, hitting 6 .8% in November. Since March 2022, the Bank has increased the overnight rate seven times, from 0.5% to 4.25%.

“We could see more mortgage defaults or, at the very least, people struggling to keep up with the payments,” Zlatkin says. « People are going to start going to alternative lenders or getting a second mortgage. »

If you’re about to miss a payment, homeowners should consult with a financial planner before making rash decisions, Fox said.

A mortgage refinance is another option, which helps homeowners renegotiate the existing mortgage agreement. During this process, homeowners can extend their amortization period – the length of time it would take to pay off a mortgage in full – which can reduce monthly mortgage payments payable over a longer period.

And, going to family for temporary help is always a good route if available, Fox says.

“The last thing landlords want to part with is real estate,” he says. « People are willing to make sacrifices elsewhere knowing that their property will perform well in the long run. »

While it’s hard to tell homeowners to be patient during tough financial times, Gray says some economists say higher interest rates will come down in 15 to 18 months.

The majority of owners choose a variable rate because it is generally lower than a fixed rate. But many homeowners often overlook the drastic rise in interest rates, Gray says.

When there were rumors that the Bank of Canada would start raising its overnight rate, many real estate experts and economists were taken aback by the “speed and aggressiveness” of the overnight rate hikes. the Bank, says Fox.

« While hindsight is 20/20, most people caught in this situation have taken the approach that this tight period is only temporary and that it doesn’t make sense to lock yourself in for three or four years if rates are going to come back down at the end of 2023, which they are supposed to do,” he says.

The rapid succession of interest rate increases has caused some long-term variable rate owners to switch to fixed rates. This is the case with Melanson, which plans to move to a five-year fixed rate when fixed mortgage rates reach 3%.

« I didn’t think rates would go up so quickly in such a short time, » he says. “I was naive. I have never experienced such rate hikes before. This makes me more inclined to go for this safer option next time.

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