Bank flags risks of homeowners renewing at higher rates
Canadian homeowners are facing a significant payment shock on their mortgages unless interest rates decline in the coming years, according to a new Royal Bank of Canada (RBC) report.
The banking giant said the prospect of mortgage renewals at much higher rates also presented a sizeable risk to Canadian banks, with the possibility of rising credit losses from 2025 if rates remain near their current levels.
Around 60% of Canadian mortgages are due for renewal in the coming three years, and an increase in payments at renewal “could be significant and represents a tail risk to Canadian banks,” according to RBC Capital Markets analyst Darko Mihelic, who authored the report.
“Unless there are significant declines in interest rates, we believe that credit losses will inevitably rise, perhaps significantly in 2025 and beyond.”
Mihelic said consumers could see an increase in monthly payments by as much as 48% on a weighted average basis by 2026, when about $400 billion of mortgages are scheduled for renewal.
The pain for many homeowners could begin as early as next year, he said, with potential increases of 32% on $186 billion worth of mortgages in 2024 followed by a possible 33% spike in 2025, which will see around $315 billion of mortgages renew.
The Bank of Canada has increased its benchmark interest rate by 475 points since March 2022 in an effort to curb rampant inflation, spiking that trendsetting rate from 0.25% to 5.0%.
A 100-basis-point reduction in the central bank rate would cut the 2024 and 2025 payment shock to more manageable levels, according to Mihelic, of around 22% or 23%.
For 2026, the implications are stark. “Variable-rate mortgagors are set to see significant payment shock, perhaps as high as 84% by 2026 if interest rates do not decline,” he said. “Interest rates would need to decline significantly to ‘save’ this cohort.”
The Bank would have to slash its overnight rate to a rock-bottom 0.25% by July of that year, Mihelic said, to limit payment shock to 20% for all borrowers on variable rates. That prospect, he added, is “perhaps an unreasonable expectation at the moment.”
