Underlying risks in Canada’s mortgage market are becoming more evident as borrowers face the sharpest spike in interest rates for over four decades, the national housing agency has said.

Tania Bourassa-Ochoa (pictured), senior specialist of housing research at Canada Mortgage and Housing Corporation (CMHC), told Canadian Mortgage Professional that the agency’s just-released residential mortgage industry report highlighted the impact that rate hikes to date have had on homeowners’ ability to repay their mortgage.

One out of three borrowers have seen their monthly mortgage payment jump since the Bank of Canada began increasing interest rates in March of last year, Bourassa-Ochoa said, with over 290,000 mortgages renewed with chartered banks at higher interest rates in the first half of 2023.

“We have more signs that Canadian mortgage holders are struggling in terms of their debt payments, and so a lot of these indicators are really highlighting the vulnerability of homeowners in Canada,” she said.

An even greater shock appears to be coming down the line. About 45% of all outstanding mortgages across the country – 2.2 million in total – are expected to face higher interest rates upon renewal in 2024 and 2025, with monthly payments potentially rocketing by up to 40% of their current levels.

That’s a reality Bourassa-Ochoa said homeowners need to prepare for now. “There are already signs that are showing us that Canadians are having a harder time to make ends meet, and… one of the things that we really want to highlight with this piece is that homeowners need to be thinking about what that’s going to be looking like for them, and just start thinking about the different options that are potentially available,” she said.

“Consumers are already doing that in some ways with [longer] amortization, with their choices around interest rate terms. And then they’re delaying big purchases, reducing consumption services of non-essential goods and services. There are a lot of things that need to be taken into consideration because yes, it’s going to be a significantly higher cost.”

Delinquencies, arrears on the rise in 2023

Meeting mortgage payments traditionally ranks as a top priority for Canadian homeowners above most other debt obligations – but a growing number of Canadians are facing challenges making those other debt payments, CMHC said.

A wave of mortgage renewals at significantly higher borrowing costs than the initial contract rate is looming – and that’s a reality that could pose significant tail risks to Canadian banks, according to Royal Bank of Canada (RBC).

A recent report by the banking giant, authored by capital markets analyst Darko Mihelic, indicated that around 60% of Canadian mortgages are coming up for renewal in the next three years, with the prospect of an inevitable and “perhaps significant” rise in banks’ credit losses in 2025 and beyond unless rates fall.

Next year could see potential increases of 32% on $186 billion worth of mortgages, RBC said, followed by a possible 33% spike on the renewal of $315 billion worth of mortgages in 2025.

Speaking before a Senate committee last week, Bank of Canada governor Tiff Macklem cited that impending flurry of renewals as a key reason the central bank kept interest rates on hold in its latest policy rate decision.

Chris Allard (pictured top), an Ottawa-based mortgage broker, told Canadian Mortgage Professional that he and his team had been in regular communication with clients about that issue since last year, fielding queries and running through options for when that renewal eventually arrives.

“Our team is proactively calling our clients right now. We’ve been doing that for about a year now – just touching base with the clients that we’ve helped over the last five years to make sure that we can answer some of these questions that people have,” he said.

How can borrowers absorb the shock of higher mortgage costs?

Many clients are uncertain about what awaits them at renewal, Allard said, meaning it’s never been more important to be able to lay out a clear set of eventualities for what may arise at that point.

“For a lot of people, it’s roughly a 30% to 50% increase [in payments] depending on the exact rate they had,” Allard said. “And then we just run simulations to say, ‘OK, well, if the rates today are the rates of next year, then this is what you can expect. If rates are 1% less, then this is what you can expect…’

“We try to have a bit of a cash flow conversation. Part of the conversation is ‘If there’s any additional room, from a budgeting perspective, let’s pretend as though your mortgage payment is 6% and that additional money, let’s be putting that off to the side each month because it’ll just help you get used to that payment that you’re going to face maybe a year from now.’”

No borrower relishes hearing that their monthly payments are likely to spike in the near future – but Allard said that most have their minds put at ease to some degree by having those discussions with brokers and planning ahead for what may come down the line.

“We can’t confirm what rates will be in the future,” he said. “But at least if they run three simulations, they can plan adequately, or as best they can. And even though it’s not necessarily ideal or comfortable for a lot of these people, I think everything will be just fine.”

Other advice around budgeting is also top of mind for borrowers, Allard added. “We try to chat with the same borrowers about their budget right now and how things have been impacted, and try to come up with different ways to save money,” he said.

“Remind them that they probably have subscription that they’re paying for that they probably don’t need, perhaps go through the credit card statements and see if there’s five bucks or $100 that you can save on a monthly basis.”

Rate cuts on the horizon could spell good news ahead for borrowers

The good news for borrowers is that there seems little prospect that interest rates will stay at their current level for a prolonged period, with top economists largely expecting the Bank of Canada to introduce cuts at some point in the second half of 2024.

Reducing the central bank’s current interest rate by 1% wouldn’t blast away borrower pain completely, RBC’s Mihelic added – but it would cut the 2024 and 2025 payment shock to a more manageable level of around 22% or 23%.

Source CMP
By Fergal McAlinden

Residential mortgage debt in Canada totalled $2.14 trillion as of August this year, up by 3.4% compared with the same month in 2022 as the value of uninsured mortgages outstanding saw a sizeable increase.

Canada Mortgage and Housing Corporation (CMHC), the national housing agency, said in the latest edition of its Residential Mortgage Industry Report – released Thursday – that the value of uninsured mortgages issued by non-bank lenders crept up by 9% year over year, while 73% of outstanding residential mortgages issued by chartered banks were uninsured in the second quarter of 2023.

That trend arrived despite a slowing overall mortgage market, with growth in the first eight months of the year declining over the same period in 2022 as homebuying activity continued to cool.

Borrowers turning away from one- to two-year fixed-rate mortgages

CMHC said a noted shift in borrower preferences toward fixed-rate mortgages and away from variable products had continued to gather pace, with federally regulated institutions issuing $244.5 billion worth of new and renewed fixed-rate mortgages between January and August, compared with just $20.1 billion in variable-rate options.

The recent trend that saw many Canadians gravitate towards shorter-term fixed-rate mortgages of one or two years in anticipation of a potential interest rate cut down the line also appears to be reversing. CMHC’s report said borrowers were now increasingly opting for fixed-rate agreements of between three and five years, “indicating that hopes for an immediate decrease in interest rates have faded.”

Alternative lending space growth continuing, but moderating

The rise of Canada’s alternative lending space, meanwhile, is continuing – although CMHC noted that its pace of growth for the first three months of the year was much milder than previous quarters.

The country’s top 25 mortgage investment corporations (MICs) saw their assets under management increase by 7.1% in Q1, the first time in six consecutive quarters that that measure has not risen by double digits on a year-over-year basis.

The risk profile of the segment also increased slightly compared to 2022, the Crown corporation said, but its risk level remains “relatively low” compared to the years prior to the COVID-19 pandemic.

CMHC indicated that alternative lenders could see capital availability diminish in the coming quarters as investors turn their attention towards other lucrative investments, “with less or no exposure to our housing markets.”

Mortgage arrears continued to rise for non-bank lenders and mortgage investment entities but stayed stable for chartered banks and credit unions. While those rates have not risen dramatically compared with the years before 2020, CMHC nonetheless said recent increases “suggest continuous monitoring is necessary.”

Longer amortizations, slowing activity evident in traditional space

Among traditional lenders, purchase and refinance activity slowed noticeably. Chartered banks saw a 44% drop in the issuance of mortgages to buy a home, while refinances dropped by 34% compared with the same period in 2022.

That decline in purchase activity unsurprisingly arose as a result of a milder housing market, while CMHC said refinances had waned because of higher rates and stationary home prices reducing available equity.

The growing trend of longer mortgage amortizations was reflected by CMHC figures that showed almost two out of every three newly extended mortgages issued by chartered banks had an amortization of more than 25 years, a sharp increase from just half in 2020.

That said, in the traditional lending segment, mortgages’ overall risk profile remains “relatively unchanged” this year compared with 2022, CMHC said.

Source CMP
By Fergal McAlinden

Further interest rate hikes from the Bank of Canada are very much still on the table as its governing council remains split on whether rates may need to rise further.

The central bank on Wednesday released its summary of deliberations detailing the discussions governing council members had in the lead-up to its Oct. 25 rate decision, which kept its key rate on hold at five per cent.

On the issue of whether interest rates are high enough, the summary suggests members of the governing council are split.

“Some members felt that it was more likely than not that the policy rate would need to increase further to return inflation to target. Others viewed the most likely scenario as one where a five per cent policy rate would be sufficient to get inflation back to the two per cent target, provided it was maintained at that level for long enough,” the summary said.

The Bank of Canada ultimately decided to exert patience, but members of the governing council agreed to revisit whether rates need to rise further.

The central bank remains concerned that inflation is not falling fast enough, despite the economy responding to higher interest rates.

Canada’s inflation rate fell to 3.8 per cent in September, but underlying price pressures have not eased by much in recent months.

Core measures of inflation, which strip out volatile price movements, have remained in the 3.5 to 4.0 per cent range over the last year, the central bank notes.

The Bank of Canada’s governing council attributed the persistence of high inflation to several factors, including rising shelter prices.

The central bank’s interest rate hikes are partly to blame for that, given they have fed into higher mortgage interest costs for Canadians.

However, the central bank has recently noted that other shelter costs remain elevated, largely due to imbalances in the housing market.

“Higher interest rates would normally exert downward pressure on house prices and other costs that are closely linked to house prices, such as maintenance, taxes and insurance,” the central bank said.

“However, the ongoing structural shortage of housing supply in the economy was sustaining elevated house prices. And the rapid increase in Canada’s population had added to the existing imbalance between demand and supply for housing.”

Source CP24
By Nojoud Al Mallees

The Canadian economy is showing continued signs of slowing as inflation decelerates. This opens the door for a continued pause in rate hikes. Indeed, with any luck, the Bank might have finished its tightening cycle.

One more rate hike is possible, especially if continued Middle East tensions lead to a sustained oil price increase, but the odds are against it.

This does not suggest, however, that interest rates will decline anytime soon. Headline inflation in September was posted at a 3.8% year-over-year pace, well above the Bank’s 2% target. Wage inflation remains at roughly 5%, and inflation expectations remain high.

However, the economy is slowing, and excess demand in labour markets is waning. Third-quarter economic growth is likely to be less than 0.5%, and leading economic indicators are pointing to a further slowdown in the final quarter of this year and the first quarter of 2024.

Canadian consumers, weighed down by record debt loads and high prices, are tightening their purse strings. Savings rates have fallen, and retail sales per capita have slowed markedly. Sales were down in six subsectors: car dealers, furniture, electronics, and appliance retailers.

Canadians are quickly rolling back their purchases of goods as more households face mortgage payment renewals. The Bank of Canada consumer survey suggested that families expect more adverse effects ahead as an increasing volume of mortgages come due for renewal or refinancing.

Businesses are also tightening their belts as the recent Bank of Canada Business Outlook survey showed considerable weakness. The Bank is counting on softening demand to translate into a slower inflation rate in the coming months.

I expect the central bank to cut interest rates in mid-2024, gradually taking the overnight policy rate down. In the meantime, housing markets will continue seeing a surge in new listings and more favourable buying opportunities.

Is your mortgage coming up for renewal? Do you know about all the incredible options renewing your mortgage can afford you?

If not, I have all the details here on how to make your mortgage renewal work for you as we start to think about 2024.

Get a Better Rate
Are you aware that when you receive notice that your mortgage is coming up for renewal, this is the best time to shop around for a more favourable interest rate? At renewal time, it is easy to shop around or switch lenders for a preferable interest rate as it doesn’t break your mortgage. With interest rates expected to come down as we move into the New Year, taking some time to reach out to me and shopping the market could help save you money!

Consolidate Debt
Renewal time is also a great time to take a look at your existing debt and determine whether or not you want to consolidate it onto your mortgage. For some, this means consolidating your holiday credit card debt into your mortgage, for others it could be car loans, education, etc. Regardless of the type of debt, consolidating into your mortgage allows for one easy payment instead of juggling multiple loans. Plus, in most cases, the interest rate on your mortgage is less than you would be charged with credit card companies.

Start on that Reno
Do you have projects around the house you’ve been dying to get started on? Renewal time is a great opportunity for you to look at utilizing some of your home equity to help with home renovations so you can finally have that dream kitchen, updated bathroom, OR you can even utilize it to purchase a vacation property!

Change Your Mortgage Product
Are you not happy with your existing mortgage product? Perhaps you’re finding that your variable-rate or adjustable-rate mortgages are fluctuating too much and you want to lock in! Alternatively, maybe you want to switch to variable as interest rates start to level out. You can also utilize your renewal time to take advantage of a different payment or amortization schedule to help pay off your mortgage faster!

Change Your Lender
Not happy with your current lender? Perhaps a different bank has a lower rate or a mortgage product with terms that better suit your needs. A mortgage renewal is a great time to switch to a different bank or credit union to ensure that you are getting the value you want out of your mortgage if you are finding that your needs are not currently being met.

Regardless of how you feel about your current mortgage and what changes you may want to make, if your mortgage is coming up for renewal or is ready for renewal, please don’t hesitate to reach out to me! I’d be happy to discuss your situation and review any changes that would be beneficial for you to reach your goals; from shopping for new rates or utilizing that equity! I can help you find the best option for where you are at in your life now and help you to ensure future financial success.

Canada’s unemployment rate ticked higher in October, rising to 5.7% as the national economy continued to cool.

New figures released by Statistics Canada showed that the labour market added 18,000 jobs last month in a clear sign that the Bank of Canada’s efforts to tap the brakes on economic growth are having an impact.

The October jobs figures mean that the national unemployment rate has now increased four times in the past six months, with last month’s rate up from 5.5% in September.

During the spring, the Bank of Canada’s decision to hit pause on interest rate hikes helped trigger something of an unexpected resurgence for the national housing market, with buyers stepping off the sidelines as rates finally stopped climbing.

In May, an RBC report indicated that the spring months were beginning to look like a “turnaround point” for home sales in Canada, which had surged by 11.3% month over month in April in the strongest such increase for almost three years.

That uptick in activity was most apparent in Canada’s two traditional housing market hotbeds, Toronto and Vancouver, where buyers were “quickly regaining confidence,” RBC said, in light of the central bank’s pause on rate increases.

After resuming that rate-hiking path in a hurry over the summer with two 25-basis-point jumps amid a stronger-than-expected economy and resilient inflation, the central bank has now decided to stay put in its last two announcements, leaving rates untouched in September and October.

Could that new pause spur another flurry of activity in the housing market before the end of the year – or are rates simply too high for another market upswing to occur?

BMO chief economist Doug Porter (pictured top) says the latter is likely the case. “Our view is that the housing market has not completely digested the latest rising rates as well as the run-up in long-term bond yields, which is being reflected in longer-term mortgage rates,” he told Canadian Mortgage Professional last week.

Indeed, there’s likely to be more pain ahead for homeowners, with current high rates and projected milder activity set to see home prices take a further dip in the months ahead.

“Our view is that combined with some underlying slowdown in the economy, that’s likely to keep the housing market tame for the next six months,” Porter said. “There’s probably another [downturn] in prices nationally, essentially reversing the run-up we saw in the spring and earlier summer. We would expect prices to drop back towards the lows that they hit earlier this year.”