Rates are falling – but is it enough?
Interest rates and borrowing costs may be on the way down in Canada – but with a wave of mortgages coming up for renewal in the coming years, scores of homeowners are still facing the prospect of their monthly payments spiking under a new rate.
For brokers, helping clients who are existing homeowners find a manageable rate upon renewal has been a common challenge throughout the year to date, a trend that’s only likely to intensify looking ahead.
For 2024 and 2025 combined, a total of over $675 billion in mortgage loans will be renewed, according to Canada Mortgage and Housing Corporation (CMHC), a figure equalling nearly 40% of Canada’s overall gross domestic product (GDP).
Should borrowers and market watchers be aware of the possibility of the Canadian economy toppling amid next year’s expected renewals surge?
Speaking to Canadian Mortgage Professional after the Bank of Canada cut its benchmark rate on July 24, Bank of Montreal (BMO) chief economist Doug Porter (pictured top) said some borrower pain is certainly on the way, although it’s likely to be contained and manageable.
The renewal environment in 2025, he said, is likely to be a challenging one. “It’s not going to be easy for people whose mortgage is coming up next year, almost regardless of what the Bank of Canada does,” he said. “Unless there’s something horrible that happens to the economy, people who took out mortgages in the pandemic are going to be looking at rate hikes. They’re going to be looking at higher payments.”
Still, the good news is that few, if any, borrowers are likely to be caught by surprise by the prospect of paying a higher mortgage rate upon renewal. The coming wave has been extensively discussed throughout this year and last, not least by the Bank of Canada.
That means borrowers will already have been exploring their options in many cases, according to Porter. “It’s not going to be a shock to anyone,” he said. “They’ve had a long time to prepare for that reality and I think they’re going to have options. Rates will be coming down. They might only have to lock in for a year or two and look forward to somewhat lower rates a bit further out.”
Leah Zlatkin, COO and broker at Mortgage Outlet, notes that despite the Bank of Canada's recent rate cuts, the gap between fixed and variable mortgage rates remains significant.
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 9, 2024
Read more: https://t.co/cA8juOkunQ
How will events in the US impact Canada?
Prospects of much lower rates down the line received a shot in the arm last week as slowing economic data in the US and the possibility of a recession south of the border saw markets begin to predict a higher Federal Reserve rate cut in September than originally expected.
That could give the Bank of Canada greater leeway to trim its own benchmark rate in the months ahead, although Porter and BMO senior economist Robert Kavcic said in a note that the Canadian central bank is already “a step ahead of the game” after first lowering rates two months ago.
Fixed rates have slipped over the past week in response to the gloomy economic news coming from the US, while further Bank of Canada cuts would have a direct impact in bringing variable rates lower.
Whatever the case, with little indication that rates are set to spike again anytime soon, Porter said the outlook for homeowners renewing looks at least marginally better than it did while the Bank was firmly in the midst of a rate-hiking bias. “I do think we’re past the period of maximum pain, and people whose mortgages are coming up for renewal next year will have some options,” he said.
“They might not all be great options – but they will have some options that I think will be manageable for most.”
Are high rates causing many homeowners to list their property?
To what extent has an uptick in new listings reflected the reality of homeowners grappling with burdensome higher rates? Those rates have had some impact on the market, according to Royal Bank of Canada (RBC) assistant chief economist Robert Hogue.
In a recent report, Hogue said supply had improved, particularly in Toronto, mainly because of the completion of newly built units that owners wanted to offload. “In other cases, it could be sellers betting lower rates will spur buyer interest and improve sales outcomes,” he added. “In some, it may be a sign of homeowner distress arising from high rates.”
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