Here are the big concerns…
Canada’s household debt is now the highest in the G7 – and amidst economic headwinds and rapidly rising interest rates, some observers have sounded concern about the fragility of the national housing and mortgage markets in recent weeks.
While rock-bottom interest rates at the height of the COVID-19 pandemic helped spur a housing market boom across the country, those rates surged after March 2022 as the Bank of Canada waged war on rampant inflation.
With the Bank’s trendsetting interest rate having spiked by 450 basis points over the last 15 months, many variable-rate mortgage holders have seen their borrowing costs increase dramatically while fixed rates have also shot upwards.
International Monetary Fund (IMF) economist Nina Biljanovska believes Canada ranks first in the world for mortgage default risk, with high household debt and a larger number of floating-rate loans heightening the risk of default.
Meanwhile, the national housing agency has indicated that sky-high mortgage debt has the potential to worsen the impact in Canada of a possible global recession.
“Canada’s very high levels of household debt… make the economy vulnerable to any global economic crisis,” Canada Mortgage and Housing Corporation (CMHC) deputy chief economist Aled ab Iorwerth said in a recent note.
About three-quarters of household debt across the country is made up of mortgages, ab Iorwerth noted – and leading economists including CIBC’s Benjamin Tal have highlighted the potential risk posed by homeowners having to renew their mortgages at much higher rates in 2025 than they took out during the pandemic.
Canadian Real Estate Association (CREA) senior economist Shaun Cathcart noted that while a bumpy ride could be in store in the coming years, home prices were likely to continue climbing.https://t.co/q0c0yiWKRl#mortgagenews #industrytrends #homesales #houseprices
— Canadian Mortgage Professional Magazine (@CMPmagazine) June 22, 2023
That’s a looming prospect that the mortgage broker community is also keeping its eye on. Terry Kilakos (pictured top), founder and president of North East Real Estate and Mortgage Agency, told Canadian Mortgage Professional that clients who saw “all the stars align” and secured a record-low rate during the pandemic would inevitably face much higher costs upon renewal.
“It wasn’t common for [rates] to be that low, but it is my concern because regardless of what’s going on with the interest rates, whether they stay put or they come down a little bit, that client is going to have a rate that’s going to be at least doubled from what they have right now,” he said.
Are longer amortizations the answer?
Spiralling mortgage rates and the challenges they pose for consumers have seen many lenders offer extended amortizations for variable-rate clients, with Kilakos also noting the opportunity to stretch out amortizations for renewals.
“These clients that had insured mortgages that were very low, sub-2% [interest rates] – they’re typically 25-year amortizations,” he said. “So when these mortgages do come up for renewal, if the client for one reason or another finds themselves in a position where they can’t afford these payments or the payments have gone up drastically, nothing stops us from rejigging that amortization, bringing it up to 25 or maybe even 30 years.
“And that would help them alleviate some of the stress of the payments on a monthly basis, depending obviously on what interest rates are going to be like when the mortgage comes up for renewal.”
The Office of the Superintendent of Financial Institutions (OSFI), Canada’s financial regulator, has warned of the long-term risk of extending amortizations, with assistant superintendent Tolga Yalkin noting in April that those were essentially stopgap solutions.
“While this is one way to cope with higher interest rates in the short term, it’s not without risk, given extended amortization periods keep borrowers in debt longer and lead to higher interest payments,” Yalkin said.
How are lenders approaching the current volatile market?
In the United Kingdom, some lenders have reacted to market instability by adjusting their product ranges – and in some cases, pulling back entirely – to maintain service levels.
In Canada, there’s been no sign of such wariness. “I think the product offering has actually been growing in the last little while because of lenders needing to compete in a market where it’s down year over year,” Kilakos said.
“They needed to do stuff to actually increase the amount of business that was coming to them – so I haven’t seen them taking stuff off the table.”
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