Payment shocks are a real risk in the current environment
Variable-rate borrowers might need hundreds of thousands of dollars in extra funds to stave off the negative effects of rising payments, according to Desjardins.
This is mainly because variable-rate borrowers who are coming up on their renewal would almost certainly experience a significant increase in their likely payments, said Royce Mendes, managing director at Desjardins.
The shock would come about as a result of these borrowers trying to avoid hiking their monthly payments by an unprecedented amount – as much as 30%, in many cases.
“Our simulations show how vulnerable some homeowners will be when it comes time for renewal,” Mendes told Yahoo Finance Canada. “There are likely some homeowners who have no idea what type of payment shock they could be in for.”
“Our simulations find it’s currently taking a lump sum payment equal to roughly 20% of the original loan value to keep the payments unchanged,” Mendes outlined in his recent note. “To put that in perspective, a first-time homebuyer who purchased a house in 2018 for $1,000,000 and put $200,000 down would need to put up another $160,000 to keep their monthly mortgage payment steady.”
Mendes predicted that a significant share of variable-rate borrowers will go for a combination of both options – larger instalments and a substantial one-time payment – come renewal time to cushion the impact.
“Borrowers can use a combination of mitigation strategies to deal with the shocks,” Mendes said. “However, those are not foolproof and the market has seemingly yet to catch on to the complications the Canadian economy will face.”
“Any way you slice it, there will be pain, particularly if rates don’t fall as much as we forecast.”
