Troubled waters could be ahead – but there’s no need to panic yet
Mortgages renewing at much higher interest rates than before are expected to play a significant role in curbing discretionary spending in the coming years – but just how much could that trend weigh down on Canada’s economy?
The Bank of Canada has already highlighted the potential impact of the coming renewal surge, noting that while only around 45% of mortgages taken out before its 2022 rate-hiking cycle began had been renewed last November, “virtually all” of the remaining borrowers in that cohort would go through renewal by the end of 2026.
That’s significant because scores of mortgage holders, including those on variable rates, fixed payment, and shorter-term fixed rates, are set to see their budgets squeezed by renewing in a higher-rate environment than that which prevailed during the COVID-19 pandemic.
In its economic outlook for 2024, Manulife Investment Management highlighted mortgage renewals as a prominent challenge for the Canadian economy because of the projected hit on overall consumption and negative impact on the housing market.
That said, there’s little chance of a mortgage meltdown in the years ahead, according to that report’s author Dominique Lapointe (pictured top), global macro strategist at Manulife.
He emphasized to Canadian Mortgage Professional that the Bank of Canada report on the potential effect of mortgage renewals between now and 2026 assumes an interest rate environment that could actually be higher than what transpires.
“I say looking at these expectations and the five-year bond yield right now, where it is and where I think it might go – settling in… this year, and then the possibility for a moderate rebound – I think there’s a chance that mortgage rates become lower in 2025 and 2026 than what this study suggests,” he said.
“It’s probably not going to go down to 1% or 2%, in terms of the bond yield, to mortgages around 3% and 4%. But I think there’s some downside risk there because of how high it is right now and how it usually quickly declines when there’s some economic weakness.”
Is the 2025 outlook more positive for Canada’s mortgage market?
There are still plenty of question marks over the Bank of Canada’s future path on interest rates, including when or whether it will decide to trim its benchmark rate and how far inflation needs to fall before the central bank is convinced that a further uptick definitely won’t happen.
Still, with markets continuing to expect at least one rate cut before the end of 2024, Lapointe said the outlook appears at least mildly more optimistic on the mortgage front next year and beyond.
The Bank of Canada is likely to leave its overnight rate unchanged in its first decision of 2024, according to new forward guidance by the Royal Bank of Canada (RBC).
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 19, 2024
Read more: https://t.co/niAXMUFwtb#breakingnews #ratehike #interestrates #mortgageindustry
“If we go through 2024 without big issues with mortgages, I think there’s a higher chance that 2025 is smoother, because mortgage rates will have declined a little bit,” he said. “In our forecast, this is a 2024 story – so labour prospects will be better, and of course that’s the most important factor for you to pay your mortgage.”
Insolvencies per province have picked up over the past year, with some creeping close to their 2018 highs – but there’s no sign of widespread default, according to Lapointe.
That could change if the labour market weakens and Canadians lose their jobs or face reduced hours, meaning their can’t refinance or afford financing. Nonetheless, Manulife is confident Canada’s labour market remains “in good shape” despite falling business sentiment.
How significant could negatively-amortizing mortgages prove?
Another significant factor that will influence the mortgage outlook: how financial institutions actually treat mortgages in 2024, particularly with a huge number of variable-rate mortgages having hit their trigger points and entered negative amortization since rates started climbing.
“So how will this be treated on renewal? We know that OSFI [the Office of the Superintendent of Financial Institutions] said you shouldn’t extend the mortgage over the original term, even if on paper this is what’s happening,” Lapointe said.
“Is this going to create more stress? Are banks going to find ways to help their clients navigate through this? Are they going to be stricter? That’s a big question market that could put more or less stress on the sector.”
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