Most borrowers are able to absorb the impact of higher payments, but others are struggling
Mortgage delinquencies are on the rise across many Canadian markets – particularly in Ontario – as borrowers grapple with the challenge of managing a higher rate in most cases upon renewal than when they originated the mortgage.
But interest rate cuts by the Bank of Canada over the past year and a slide in fixed rates caused by a drop in 10-year Government of Canada bond yields mean the outlook seems much less perilous than in previous years, when plenty – including the central bank – sounded the alarm about the prospect of a “renewal cliff” in 2025 and borrowers struggling to absorb the payment shock.
The Bank of Canada has slashed its own benchmark rate by a full two percentage points since the middle of last year, bringing it down from a two-decade high of 5%, with a further cut expected at tomorrow’s announcement.
Bond yields, meanwhile, have tumbled since the beginning of the year, not least over the past week as financial markets adjust uneasily to the prospect of a punishing US-Canada trade war.
That’s not to say mortgage holders are out of the woods yet, and plenty are viewing their renewal with trepidation even despite the significant dip in rates seen in recent months.
“A lot of people are quite frightened this year and into next year as to what their renewal rates are going to force their payments to go up to,” Joe Sammut (pictured top), a mortgage broker with Mortgage Architects, told Canadian Mortgage Professional.
Has the stress test been a saving grace for the Canadian mortgage market?
The good news is the fact that most borrowers were required to stress test their mortgage at the higher rate between 5.25% and two percentage points above the agreed contract rate means they’ve already proven they can stomach a rate increase, even from rock-bottom COVID-19 levels.
“I believe that the stress test, as much as we argued against it originally, was one of the best things that was ever implemented because it gave people the ability to weather the storm,” Sammut said. “So unless they went out and [built up] a lot of consumer debt, they should still be able to weather the storm with the rate increases that they’re going to be faced with.”
Delinquencies are on the rise from unusually low levels and remain below historical averages, meaning a ripple effect has yet to be felt across the mortgage market.
“I haven’t seen many people having difficulties,” Sammut said. “The individuals that I’m witnessing having difficulty are very hard case files. They’ve had other life events that have taken place that have put them in a position and the affordability is just out the window. But from an average, every consumer, job security, income to debt ratio perspective… for the most part, people are OK.”
No meltdown in sight – but the crisis isn’t over yet
As the Bank began to trim its benchmark rate last year, top economists started to predict a less bumpy road ahead in 2024 than envisaged for mortgage borrowers renewing.
TD’s Maria Solovieva said in November that the outlook had shifted slightly in homeowners’ favour. “Our analysis suggests that mortgage renewals are going to be less stressful for households than previously feared, with aggregate payments on Canadian mortgages poised to decline for balances outstanding as of mid-2024,” she noted.
“The key factors behind this expected easing are lower interest rates and increased payments, which have helped to front-load the payment shock.”
The pre-emptive steps taken by Canadians as their mortgage renewal loomed into view helped mitigate the impact, she said, including refinancing into fixed-rate mortgages and reducing spending in other areas to maximize their mortgage payments.
Still, RBC said last month that “significant” financial strain awaited many homeowners, even though the stress test would prevent a more severe negative reaction.
“While lower interest rates in 2025 will provide some relief, they won’t be enough to fully offset the higher financing costs many will encounter,” the bank’s assistant chief economist Robert Hogue wrote. “This could force some owners to sell, adding to inventory and tempering price growth.
“However, Canada’s stringent mortgage stress test rules should help prevent a surge in distressed sales, keeping market imbalances generally in check.”
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