By Paul Vieira
OTTAWA–The Bank of Canada will keep close tabs over the next three years on any fallout from pending mortgage renewals–totaling about a half trillion dollars in loans–because roughly 3.5 million households could face “significantly” higher loan payments, the central bank’s No. 2 official said Thursday.
Bank of Canada Senior Deputy Governor Carolyn Rogers said about 40% of mortgage holders have made higher loan payments since early 2022, or when the central bank started a yearlong-plus rate-rising campaign that lifted its main interest rate by 4.75 percentage points, to 5%. She said the remaining 60%, or about 3.5 million households, need to renew prior to the end of 2026. “Depending on the path for interest rates, [they] may face significantly higher payments,” said Rogers, according to prepared remarks she was set to deliver in Vancouver, British Columbia.
Canada’s economy declined slightly in the second quarter, and early estimates indicated it stalled in the third quarter, as the impact of steeper borrowing costs crimp household consumption. The Bank of Canada left its benchmark interest rate unchanged last month, adding that the economy is shifting from a state of excess demand–where producers can’t keep up with consumption–to a state of spare capacity, when supply exceeds demand. Market participants believe the central bank starts to cut interest rates in April of next year, according to a central-bank survey.
In a note to clients this week, economists at Desjardins Securities said financial markets are not “fully accounting” for the headwinds the Canadian economy faces. Unlike the U.S., Canadian lenders tend to issue mortgages on five-year terms, so households looking to renew must do so at higher rates. “Mortgage renewals remain an underappreciated structural risk,” Desjardins said. Mortgages tend to be priced based on the yield on the five-year government of Canada bond.
On Thursday, the state-owned mortgage insurer, Canada Mortgage and Housing Corp., said it estimates that the total amount of mortgage loans that need to be renewed in 2024 and 2025 sits at about 675 billion Canadian dollars, or the equivalent of US$489 billion. Based on its calculations, CMHC said it estimates monthly mortgage-financing costs could increase between 30% and 40%, or the equivalent of an additional C$15 billion a year.
“The additional financial pressures will weigh heavily on homeowners in the years to come,” CMHC said, in a report updating mortgage-market conditions. “Overstretched borrowers are at greater risk of default. This risk is particularly pronounced in a slower economy.”
In her remarks, Rogers said consumers suggested in a recent central bank survey that mortgage payments are reaching a point that could force homeowners to pare back other expenditures. Further, consumers surveyed believe they will face more pressure from higher rates. Rogers said most mortgage holders “still expect they will be able to manage higher payments when they renew.”
Data indicate that household credit growth in recent months has decelerated to its lowest level in about 30 years. “Some are finding it harder to deal with existing debt,” she said, noting delinquency rates on credit cards, car loans and unsecured lines of credit have either returned to or surpassed prepandemic levels. Households with mortgages, she added, “are showing only a modest increase in financial stress related to their non-mortgage debt.”
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