The Canadian real estate market has experienced significant fluctuations in recent years, from ultra-low interest rates driving a surge in demand to a sudden increase in interest rates not witnessed in a generation. As a result, the mortgage landscape is constantly evolving, making it challenging for homeowners to keep up with these changes.
Higher Interest Rates and Mortgage Renewals
Now, with expectations of higher interest rates persisting, many homeowners who secured low-rate mortgages several years ago are bracing themselves for potential financial challenges as their mortgage renewal approaches.
Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, notes that roughly two percent of mortgage holders face renewals at considerably higher interest rates each passing month. This surge in interest rates is expected to have varying impacts on borrowers, depending on their mortgage type.
Impact on Fixed-Rate Borrowers
For borrowers with fixed-rate mortgages, the average monthly payments are projected to increase by approximately 14 to 25 percent in the coming year, compared to early 2022. By 2025 and 2026, these payments may rise by 20 to 25 percent.
Impact on Variable-Rate Borrowers
On the other hand, individuals with variable-rate mortgages have already experienced a substantial 49 percent increase in payments as of this year. Borrowers with variable rates and fixed monthly payments are facing the most significant challenges. Some of them have been covering only the interest costs, or even less, with their current payments. It is anticipated that these borrowers will see an average payment increase of 44 percent by 2026 when their mortgages reset.
In September, Peter Routledge, head of Canada’s banking regulator, expressed concerns about this category of borrowers, which accounts for about $369 billion of the $2.1 trillion outstanding mortgage market. He warned that they are “at risk of suffering a significant payment shock” and hopes to see fewer of these types of mortgages offered.
Extended Amortization and Equity Building
To alleviate the pressure of rising payments, banks and lenders are responding by extending the amortization period, which reduces the monthly payments. As of the second quarter, over 46 percent of Canadian mortgages had payment schedules exceeding 25 years, a number that has steadily risen from approximately 32 percent in the summer of 2020.
Several major Canadian banks now offer mortgage amortizations exceeding 30 years, with the majority extending beyond 35 years. Some banks, like Scotiabank, maintain a lower percentage of mortgages past the 30-year mark. However, these extended terms have raised concerns as they slow down the rate at which homeowners build equity in their homes.
Addressing the Mortgage Challenges
To address these concerns, lenders have started reducing the number of 30-year plus mortgages, typically by a percentage point or two. Borrowers with extended amortizations may need to make lump-sum payments or increase their monthly installments to bring their loans back on track, as recommended by the regulator.
However, finding the funds to meet these requirements can be challenging for some borrowers, particularly as cracks emerge in credit markets. Delinquencies in auto loans, credit cards, and lines of credit have been on the rise.
Exploring Alternative Options
Meaghan Hastings, CEO of The Mortgage Coach brokerage, suggests that borrowers who can’t handle higher payments or lack the cash for lump-sum payments will need to explore alternative options. Many borrowers may find themselves pushed into the alternative lending market as they must pass the mortgage stress test to switch lenders.
Although alternative lending products often come with higher costs, there is a growing range of options in this space, providing solutions for borrowers to navigate challenging financial times.
Despite the financial strain, most homeowners are likely to do whatever it takes to hold onto their properties. Canadians, in general, have a strong desire to maintain homeownership and are willing to explore various strategies to protect their investments, whether it’s selling assets like cars, taking on additional work, or exploring alternative financing options.