‘It’s choking me’: This homeowner’s mortgage payments have shot up by more than $1,000 a month. What should he do?

During the height of the real estate frenzy during the pandemic Briand Melanson felt like superman.

The variable rate mortgage on his primary and investment properties reached historic lows of 1.5 per cent. The monthly payment for his primary residence sat at around $730 (he bought it in the 2010) and his rental property payments came in at around $1,100 (he bought it in 2021).

But now rates are soaring and his variable mortgage payments have shot up, leaving Melanson in a financially difficult situation.

His properties both face mortgage rates of around six per cent. It's resulted in his primary residence payment soaring to $1,165, and his rental apartment to $1,775. That means, Melanson is now paying $1,110 more a month in mortgage payments for both properties - he is currently making up the difference for his renter who has fixed rent for the yearlong lease.

It's choking me," Melanson says. It's choking more than I thought it was going to."

To help with the additional costs he's put a hold on his social life; no concerts, hockey games, restaurants, drinks out, or movie theatres. As a musician who loves being with friends, it's a tough blow.

I basically have no life," he says. Luckily my income is still strong but I'm very conservative when it comes to financial stability. If interest rates rise drastically, I back off on everything else to avoid filing for bankruptcy."

It's becoming more common for homeowners to adjust their lifestyle to accommodate rising mortgage payments, says Ralph Fox, broker of record and founder of Fox Marin Associates.

And rising mortgage payments are compounding with inflationary pressures, which are pushing up the cost of groceries and energy bills.

People are getting hit from all sides right now with rising costs," he said. But the last thing you want to do it sell your home. So, you cut back costs everywhere else."

For Fox, who owns multiple properties with mortgages with variable rates, that means holding off on vacation plans in 2023. Many of his clients are cutting back on discretionary spending, such as memberships, subscriptions, and food and entertainment.

It's a first step for homeowners feeling the financial squeeze, says Janet Gray, financial planner at Money Coaches Canada.

People really need to cut back," she says. Oftentimes, cutting discretionary spending can help pay for added mortgage costs.

An emergency fund also becomes handy during high inflation and interest rate periods, Gray adds.

People think an emergency fund is when you lose your job, but it's not always the case. It can be used for moments like this to help with increased mortgage payments."

If homeowners or prospective buyers don't have an emergency fund set up, it's best to start saving immediately, Gray says.

And, if homeowners are still struggling to make mortgage payments after cutting discretionary spending then it's time to speak with their lender, she says.

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

Leah Zlatkin, a mortgage broker and expert with rate comparison website LowestRates.ca, is starting to see more defaults on realtor MLS (multiple listing service) site, which shows if a lender or bank is selling a home - when a home defaults the transfer of ownership goes toward the lender, who then sells the property.

Defaults are uncommon, but Zlatkin has noticed a few defaults crop up every month since the late fall.

If people bought in the pandemic, it's exceptionally hard right now, especially for first-time home buyers who already stretch themselves financially to buy their first property," she said.

The Bank of Canada could raise the overnight lending rate further, pushing interest rates higher at the beginning of 2023 to get inflation down to its target of two per cent - inflation has remained stubbornly high, clocking in at 6.8 per cent in November. Since March 2022, the Bank has risen the overnight lending rate seven times taking it from 0.5 per cent to 4.25 per cent.

We could see more mortgage defaults, or at the very least people struggling to keep up with payments," Zlatkin says. People will start going to alternative lenders or take out a second mortgage."

If you are about to default on a payment, homeowners must consult with a financial planner before making rash decisions, Fox said.

A mortgage refinance is another option, which helps homeowners renegotiate the existing mortgage loan 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 lessen monthly mortgage payments to be paid over a longer period of time.

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

The last thing homeowners want to part with is real estate," he says. People are willing to make sacrifices elsewhere knowing their property will perform well over the long term."

While it's difficult to tell homeowners to be patient during financially trying times, Gray says some economists say higher interest rates will come down in 15 to 18 months.

The majority of homeowners choose a variable rate because it's typically lower than a fixed rate. But many homeowners often don't factor in drastically rising interest rates, Gray says.

When there were rumblings the Bank of Canada would begin raising its overnight lending rate, many real estate experts and economists were caught off guard by the speed and aggressiveness" of the Bank's rate hikes, Fox says.

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

The quick succession of interest rate hikes has caused some long-term variable rate homeowners to pivot to fixed-rate. That's the case for Melanson, who plans to switch to a five-year fixed rate when fixed mortgage rates hit three per cent.

I didn't think rates would go up so quickly in such a short time period," he says. I was naive. I've never experienced rate hikes like this before. It's making me feel more inclined to go for that safer option next time."

Clarrie Feinstein is a Toronto-based business reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca