Editorial Cartoon by Graeme MacKay, The Hamilton Spectator – Thursday November 2, 2023
Haunted by High-Interest: The Looming Spector of Canadian Mortgage Renewals
In the eerie aftermath of Halloween, a haunting spector looms over Canadian mortgage holders, threatening a grim future of financial distress. The dread doesn’t come from ghouls or ghosts but from the imminent renewal of mortgages, unleashing a chilling cascade of increased interest rates set to torment thousands.
Recent analyses by RBC reveal a daunting reality: more than $900 billion in mortgages within Canadian banks are slated for renewal over the next three years. This impending wave of renewals, as pointed out by RBC researchers led by analyst Darko Mihelic, spells potential financial peril for many homeowners. An alarming 60 per cent of mortgages in Canadian chartered banks are anticipated to undergo renewal by 2026. As fixed-rate mortgage terms established prior to the Bank of Canada’s interest rate hike in October undergo renewal, borrowers are slated to face staggering increases in their monthly payments, a significant burden detailed in the report titled “Canadian Banks: A Review of Mortgage Payment Shock.”
The report forewarns that unless interest rates experience substantial declines, credit losses are bound to surge, potentially peaking in 2025 and beyond. These credit losses are estimated as outstanding payments owed to companies, including mortgage defaults. Alarming as it is, this prediction aligns with the Office of the Superintendent of Financial Institutions’ directive to major banks to bolster reserves for potential debt defaults, nearly tripling the amount set aside for bad loans compared to the previous year.
While some industry experts like Carl De Souza, senior vice-president at DBRS Morningstar, express confidence in the resilience of major Canadian banks against mortgage defaults, the forthcoming surge in renewals poses a significant threat to banks’ profitability and homeowners’ financial stability. However, the report suggests that the impact of mortgage losses might be mitigated to some extent due to Canada’s relatively low unemployment rate, which remains below pre-pandemic levels.
Nevertheless, the impending renewals paint a stark picture for homeowners. Banks are exploring options to alleviate the impending financial shocks, including renegotiating mortgage terms from variable to fixed rates. Currently, more than half of Canadians opt for a three-year fixed-term mortgage, but the stark difference in interest rates from previous years is ominous. Rates for a three-year fixed-term mortgage have climbed substantially, with estimates indicating a potential surge from the comparatively lower rates of 2019 to an alarming 6 to 8 percent at renewal, spelling financial distress for borrowers.
The report predicts a staggering increase in payments at each milestone year. In 2024, more than $186 billion in mortgages will renew, signifying a 32 percent payment shock. By 2025 and 2026, the looming numbers continue to surge, with estimated renewals of $315 billion and $400 billion, respectively. Payments are expected to soar by 33 percent and a staggering 48 percent, respectively, on a weighted average basis.
Even if there’s a hopeful return of the Bank of Canada’s key interest rate to 0.25 percent by 2026, the projected increase in payments still stands at a significant 20 percent. RBC’s estimations suggest a potential return to a lower interest rate in the future, yet the haunting reality of surging payments remains a foreboding certainty.
The post-Halloween season brings no respite as the grim spector of mortgage renewals hangs ominously over Canadian homeowners. The alarming forecasts and stark statistics paint a chilling picture of financial turmoil, urging caution and preparedness to weather the impending storm of high-interest renewals. (AI)