OTTAWA--The Bank of Canada is closely monitoring the potential fallout from pending mortgage renewals, which amount to approximately half a trillion dollars in loans. Bank of Canada Senior Deputy Governor, Carolyn Rogers, has expressed concern that roughly 3.5 million households could face significantly higher loan payments in the coming years.
According to Rogers, around 40% of mortgage holders have already experienced an increase in their monthly payments since early 2022. This coincides with the central bank's decision to embark on a yearlong-plus campaign of raising interest rates by 4.75 percentage points, resulting in a current rate of 5%. The remaining 60% of mortgage holders, approximately 3.5 million households, are due for renewal before the end of 2026. Rogers warns that depending on the future path of interest rates, these households may face significantly higher payments.
The impact of rising borrowing costs has already started to affect Canada's economy. Data suggests a slight decline in the second quarter and an estimated stall in the third quarter, primarily due to decreased household consumption. The Bank of Canada recently maintained its benchmark interest rate, indicating that the economy is transitioning from a state of excess demand to one of spare capacity where supply outstrips demand. A central-bank survey indicates that market participants expect the central bank to begin cutting interest rates around April of next year.
Economists at Desjardins Securities have issued a warning this week, asserting that financial markets are not fully accounting for the headwinds facing the Canadian economy. Unlike the United States, Canadian lenders typically issue mortgages with five-year terms. Consequently, households looking to renew their mortgages must do so at higher interest rates. Desjardins states that mortgage renewals remain an underappreciated structural risk and emphasizes that mortgage pricing often depends on the yield of the five-year government of Canada bond.
In summary, the Bank of Canada is closely monitoring the potential consequences of mortgage renewals in the coming years. Approximately 3.5 million Canadian households face the likelihood of significantly higher loan payments. The impact of rising interest rates has already reduced household consumption and slowed down the country's economic growth. The market expects the central bank to start cutting interest rates next year. Economists are warning that financial markets are not fully grasping the risks associated with mortgage renewals, particularly due to the comparatively longer five-year term for Canadian mortgages. Mortgage pricing remains closely correlated with the yield on the five-year government of Canada bond.
The Growing Concerns Surrounding Mortgage Renewals in Canada
The Canada Mortgage and Housing Corp. (CMHC) recently released a report that sheds light on the potential challenges that homeowners in Canada may face in the coming years. According to their estimates, a staggering amount of mortgage loans, totaling around 675 billion Canadian dollars (equivalent to US$489 billion), will need to be renewed in 2024 and 2025.
With this in mind, CMHC predicts that monthly mortgage-financing costs could increase by 30% to 40%, resulting in an additional C$15 billion a year. This financial burden could have significant implications for homeowners, as it may put them at a higher risk of default, especially in a slower economy.
The report highlights that consumers who participated in a recent central bank survey expressed concerns about their ability to maintain their mortgage payments without sacrificing other essential expenditures. Furthermore, these surveyed consumers anticipate increased pressure from higher interest rates. However, many mortgage holders still believe they will be able to handle the higher payments when it comes time to renew.
Recent data reveals that household credit growth has been slowing down, reaching its lowest point in approximately 30 years. Some individuals are finding it increasingly challenging to manage their existing debt. In fact, delinquency rates on credit cards, car loans, and unsecured lines of credit have either returned to or surpassed levels seen before the pandemic. On the other hand, households with mortgages are experiencing only a modest increase in financial stress related to non-mortgage debt.
These findings paint an uncertain picture for Canadian homeowners as they anticipate the renewal of their mortgage loans. The potential rise in financial pressures is a cause for concern, as it may lead to homeowners having to make tough decisions about their budgets and overall financial stability.
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