Managing director says the only thing to offset mortgage payments shocks is a lower policy rate
The Bank of Canada will ease its policy rate to 2.5% in the years ahead in order to offset the impact of mortgage payment shocks, according to Royce Mendes, managing director and head of macro strategy at Desjardins.
Mendes told BNN Bloomberg that the biggest mortgage pain will be felt in 2025 and 2026 when those who took out mortgages in 2020 and 2021 were set to renew. Desjardins’ simulations found that for those on variable rates, payments could spike by as much as 70% compared with the original rate.
Mendes also said that the Bank of Canada could begin to cut rates as soon as Q2 2024 as long as two conditions are met: the unemployment rate hitting 6.5% and the headline inflation either reaching or falling below 3%.
Mendes explained that these mortgage risks were unique to Canada because of the nature of its mortgage market and the amount of household debt Canadians have. He noted that monetary policy may begin to diverge next year.
The Desjardins economist also said that the US Federal Reserve did not need to cut rates as sharply because most people in the US have a longer mortgage cycle, protecting them from higher interest rates.
The Bank of Canada’s policy rate currently sits at 5.0%, its highest level for 22 years, having jumped by 475 basis points since March of last year as the central bank bids to tackle inflation and what it viewed as an overheated economy.
