Tumbling rates mean there’s little chance of a market meltdown from renewals, observers say
It was billed as a potential looming crisis for Canada’s economy: the wave of mortgages coming up for renewal in 2025 and 2026 at significantly higher rates than those on offer when the loan was originated. But a spate of central bank interest rate cuts and a dip in fixed rates mean that threat has faded – and renewal pain is unlikely to be a major talking point in 2025, according to market watchers.
In May, the Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, flagged mortgage lending as one of the top risks to the national financial system because of that coming flood of renewals at elevated rates.
That verdict arrived just weeks before the Bank of Canada introduced the first of a flurry of rate reductions, with its benchmark rate having now tumbled by 175 basis points – meaning variable mortgage rates have also slid significantly since May.
Doug Porter (pictured top), chief economist at the Bank of Montreal (BMO), told Canadian Mortgage Professional the potential for a market shock triggered by mortgage renewals had always been somewhat exaggerated. “It didn’t take into account the fact that the Bank was likely to cut,” he said. “I will admit, the Bank has been even more aggressive than we expected.
“But we did think that the Bank of Canada was going to help avert that so-called mortgage cliff by bringing rates down. And that risk is one of the very reasons why the Bank has been bringing down interest rates. They knew that was coming. They can read that data as well as anybody. They knew that was [going to be] a risk to the economy in ’25 and ’26 – and they’ve essentially short-circuited it.”
The Bank of Canada has lowered its overnight interest rate by 50 basis points, making a second consecutive oversized cut in response to a spike in unemployment and growing signs of a weakening economy. https://t.co/NBlnujREIG
— Canadian Mortgage Professional Magazine (@CMPmagazine) December 11, 2024
Near the end of last year, Bank governor Tiff Macklem highlighted that approaching wave of mortgage renewals as one of the key reasons for policymakers’ decision not to hike rates even further.
Little sign of payment pain at renewal time, suggests broker
On the broker side, few clients appear to be experiencing huge challenges when it comes to renewal time. Matthew O’Neil (pictured below), of Connolly Capital, told CMP his borrowers who purchased at low rates in years gone by weren’t seeing payments skyrocket when renewing. “The renewals that we’ve been seeing this year were people who bought a house in 2019 or 2020, and those rates were around 3% if you took fixed,” he said.
“So now those clients are renewing in the low- to mid-fours. They’ve been OK. There hasn’t been a huge payment shock there. What we’re finding is after five years of principal reduction and then renewing at the higher rate, the payments are in and around the same as what they were paying in the past.”
Rates set to slide further on both fixed and variable sides
Fixed rates are expected to fall further in the year ahead, while the Bank of Canada has given little indication that it’s about to halt its rate-cutting program – even if the size of those reductions may return to more standard cuts than the 50-basis-point drops seen in each of its last two announcements.
After last week’s oversized cut, Macklem said he anticipated a “more gradual approach to monetary policy” to emerge in 2025 if economic trends continue to play out as the central bank envisages.
That means while most borrowers renewing in the next two years will probably have to pay higher rates than before, the jump likely won’t be as dramatic as initially feared, according to O’Neil.
“I don’t think people are going to be out on the streets. I guess their rates are going to go up,” he said. “If you’re at 1.5% and you’re renewing at 3.5% it’s significant. But I don’t think the renewal shock is as bad as we thought it may be just because rates have come down so much over the last six months.
“If you’re renewing a 1.5% mortgage at 6%, that would be a huge shock. But if you’re renewing a 1.5% at 3.5%, I think you should be OK.”
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