The Bank of Canada has expressed concern over the potential fallout from upcoming mortgage renewals, as approximately 3.5 million households could face significantly higher loan payments. According to the central bank's Senior Deputy Governor Carolyn Rogers, around 40% of mortgage holders have already experienced increased payments since early 2022, when the bank initiated a yearlong campaign to raise interest rates by 4.75 percentage points, reaching 5%. The remaining 60% of borrowers, equivalent to about 3.5 million households, will need to renew their mortgages before the end of 2026 and may be subject to an increase in payments depending on the trajectory of interest rates.
The impact of higher borrowing costs has already had an effect on Canada's economy. The second quarter saw a slight decline, and early estimates suggest a stall in the third quarter due to reduced household consumption. Recognizing this shift, the Bank of Canada decided to maintain its benchmark interest rate in the previous month. They acknowledged that the economy is transitioning from a period of excess demand, where producers struggle to keep up with consumer needs, to a state of spare capacity, where supply surpasses demand. A central-bank survey indicates the likelihood of the bank reducing interest rates in April of next year.
Mortgage Renewals Present a Significant Risk to the Canadian Economy
Economists at Desjardins Securities have warned that financial markets are not appropriately considering the headwinds facing the Canadian economy. At the forefront of these challenges are the pending renewals of approximately 500 billion Canadian dollars in mortgages next year and in 2025. Unlike their American counterparts, Canadian lenders typically issue mortgages with five-year terms, resulting in homeowners having to renew their mortgages at higher rates. Desjardins Securities cautions that mortgage renewals pose an underappreciated structural risk.
The pricing of mortgages is typically based on the yield of the five-year government of Canada bond. Consumers, as indicated in a recent central bank survey, have expressed concerns that mortgage payments are becoming burdensome, potentially forcing them to reduce other expenditures. Additionally, the survey reveals that consumers anticipate additional pressure from higher interest rates. Despite these concerns, most mortgage holders expect they will be able to handle higher payments upon renewal.
Recent data indicates that household credit growth has slowed to its lowest level in approximately three decades. Some individuals are finding it increasingly challenging to manage their existing debts. Delinquency rates on credit cards, car loans, and unsecured lines of credit have either returned to or surpassed levels seen before the pandemic. However, households with mortgages are experiencing only a modest increase in financial stress related to non-mortgage debt.
These developments highlight the importance of closely monitoring the impending wave of mortgage renewals and their potential impact on the Canadian economy.