Trying times may be ahead, but homeowners can weather the storm in 2024, says mortgage executive
While many Canadian borrowers will continue to feel the pain of high interest rates at mortgage renewal time, homeowners should largely be able to absorb the shock of squeezed budgets in the year ahead, according to a leading mortgage industry executive.
James Laird (pictured), co-CEO of RateHub.ca and president of the CanWise mortgage lender, told Canadian Mortgage Professional that the worrisome trend of spiking rates and monthly payments was unlikely to spill over into a full-blown mortgage crisis.
“Household budgets will be strained. What we’ve got is people moving from old-world rates to new, higher rates,” he said. “We had a few of them last year, we have about twice as many this year, and we’ve watched people renew from 2% to 5% last year – albeit a smaller amount of people.
“It absolutely strains household budgets. People are making difficult decisions. They’re not doing some things that they would have otherwise done or they’re not saving as much money, so the difficult trade-offs are certainly being made on household budgets.”
Still, the fact that most borrowers’ ability to meet higher payments has already been proven through mortgage qualification requirements means they should be able to withstand the current stormy economic environment, Laird added.
“As long as the employment and income situation of the household has not changed, then the household budget should not break,” he said. “Once again, the renewal rates are in and around where anyone would have been stress tested.
“There are fixed-rate mortgages below 5% available now, which would be below what someone was stress-tested at – so we know they were underwritten to be able to make these payments which means they can again, as long as the income situation hasn’t changed.”
Interest rates have rocketed in recent years amid an inflation crisis that’s seen the Bank of Canada embark on an aggressive hiking campaign against rapid consumer price index (CPI) growth.
That marks a stark contrast from the 2020-21 housing market boom, when the central bank slashed borrowing costs to keep the economy afloat in a move that triggered a huge surge in homebuying and mortgage refinancing.
The Bank of Canada’s trendsetting interest rate, which leads variable rates nationally, currently sits at a 23-year high of 5.0%, with fixed mortgage rates having also climbed since 2022 (although they have ticked noticeably downwards in recent months).
Rates are expected to fall in 2024 – although there seems little chance of the central bank cutting until the second half of the year at the earliest, according to top economists.
Sal Guatieri from BMO notes the recent language in the Bank's rate announcement, indicating the end of the rate-hiking cycle and a potential reduction unless unexpected economic shifts occur.https://t.co/ExhJVvM1jU#mortgageindustry #industrytrends #ratehike #interestrates
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 29, 2024
How much strain will higher rates put on Canadian households?
Canada Mortgage and Housing Corporation (CMHC) has recently highlighted the impact of those higher rates on Canadian homeowners, noting that one out of three borrowers had already seen their monthly mortgage payment increase between March 2022 (when the central bank began hiking rates) and November 2023.
The first half of last year, meanwhile, saw over 290,000 borrowers renew their mortgage with a chartered bank at a higher interest rate than their original rate – and 2.2 million mortgages, or 45% of all outstanding mortgages in Canada, will be coming up for renewal at higher rates in 2024 and 2025.
Mortgage loans up for renewal are set to total an eye-watering figure of over $675 billion over that period, according to CMHC, with a potential average monthly payment increase of between 30% and 40%.
Canadians set to continue putting their mortgage payments first
Still, the national housing agency emphasized that Canadian borrowers “tend to prioritize their mortgage payment over all other debt payments and consumption choices,” a view shared by Laird.
“Not to say that it’s not painful for a few extra hundred dollars per month to go to interest in mortgage payments – it’s quite painful,” he said.
“Important things are being sacrificed and cut out of people’s lives, including savings and a financial safety net – it could be RESPS [Registered Education Savings Plans], it could be RRSPs [Registered Retirement Savings Plans], it could be all kinds of very important things. But I don’t think people are going to miss their mortgage payments unless someone’s lost a job.”
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