Canada’s housing agency is warning of a looming “shock” for borrowers renewing their mortgages as a new analysis shows the pain of higher interest rates is starting to put pressure on some homeowners.
Canada Mortgage and Housing Corp. (CMHC) released its biannual report on the country’s residential mortgage market on Thursday.
The analysis shows that more than 290,000 Canadians renewed their mortgages with a chartered bank in the first half of 2023, facing “significantly higher” interest rates and putting “financial pressure” on these borrowers.
Despite the higher debt-servicing costs, CMHC noted that the mortgage delinquency rate in Canada is holding steady at the “historically low” rate of 0.15 per cent.
But a deeper dive into those delinquency rates reveals signs of “financial strain” among homeowners, CMHC said.
The proportion of mortgages in arrears — those behind on payments — for loans valued at $400,000 or more has been on the rise since the third quarter of 2022, the agency said.
The trend is particularly visible among mortgages worth $850,000 or more, CMHC said, with delinquency rates rising three basis points to 0.13 per cent since that time.
Mortgages worth $400,000 or less are still showing delinquency rates above the higher value loans, though these metrics have held steady.
The CMHC also said the second quarter of 2023 recorded a “notable” year-over-year increase in the share of mortgages that have been in arrears for more than 30 days.
Outside the mortgage sector, the agency noted delinquencies on auto loans and other credit products have been increasing as well over the past six months.
“The decreasing ability of Canadians to make their debt payments is becoming a more significant vulnerability for the housing finance system,” the report read.
CMHC chief executive Romy Bowers told a House of Commons committee last week that she believes the risk of a spike in mortgage defaults is low, provided the Canadian labour market doesn’t see a significant jump in unemployment.
Bank of Canada official warns ‘more adjustment to come’
Canadians are facing higher debt-servicing costs largely thanks to the Bank of Canada’s rapid interest rate hikes that have seen the central bank’s policy rate rise 4.75 percentage points since March 2022.
Rate hikes are designed to take demand out of the economy and tamp down inflation by raising the cost of borrowing, pushing consumers to pay down debt and save rather than spend.
Bank of Canada senior deputy governor Carolyn Rogers addressed the country’s financial stability in a speech Thursday in Vancouver.
Rogers did not provide many hints into the Bank of Canada’s next rate decision on Dec. 6. Her message to the crowd in Vancouver was that interest rates might stay higher in the long run, and, given ongoing global uncertainty, may not return to the pre-pandemic era of low rates.
Rogers warned that while there are signs the financial system is adjusting to higher rates, there is “more adjustment to come.”
She noted that some 40 per cent of mortgage borrowers have renewed into higher interest rates since 2022, and that by 2026, the remaining share of outstanding mortgages will also have gone through the renewal cycle.
“Depending on the path for interest rates,” Rogers said, these homeowners “may face significantly higher payments.”
Looming ‘interest rate shock’
A separate article on Thursday from CMHC’s senior specialist of housing research Tania Bourassa-Ochoa put into perspective the impact on Canadian homeowners and the economy at large from the looming wave of mortgage renewals.
An estimated 2.2 million Canadians will face “interest rate shock” in the next two years as they renew their mortgages, representing 45 per cent of all outstanding mortgages in the country, Bourassa-Ochoa wrote. The total amount of mortgage loans set to be renewed in those two years is valued at $675 billion, or roughly 40 per cent of Canada’s entire economy.
Each household is expected to see an average increase in monthly mortgage payments between 30 and 40 per cent, she said.
Cumulatively, that will work out to an extra $15 billion in mortgage payments annually across the country.
Asked Thursday about whether the Bank of Canada is worried about the impact of its rate hikes on homeowners, Rogers pointed out that fewer than two in five Canadians have a mortgage, with the remaining owning their home outright or renting.
While she acknowledged the mortgage market is “important,” she said that keeping monetary policy tight to bring inflation back down to the central bank’s two per cent target will help Canadians of all stripes, mortgage or not.
“The most important thing we can do to support Canadians who are struggling with the pressure of the current financial situation is to get inflation back down,” she said.
While many forecasters expect signs of weakness in the economy will be enough to keep the Bank of Canada on the sidelines in December, deliberations from the central bank’s latest decision in October show some members felt the policy rate would need to rise higher to fully tamp down stubborn inflation.
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