Higher renewal rates: How much stress will they cause in the mortgage market?

Borrowing costs have surged in recent months. Will borrowers be able to cope on renewal?

Higher renewal rates: How much stress will they cause in the mortgage market?

As interest rates spiked in Canada over the last 12 months, fears grew among many borrowers of a looming crisis when their mortgage renews.

A series of rate hikes by the Bank of Canada, and an end to the days of record-low borrowing costs that prevailed at the height of the COVID-19 pandemic, mean most homeowners who took out a mortgage in recent years are likely to see much higher interest rates down the line.

Last October, with no end in sight to the central bank’s rising-rate trajectory, a joint RATESDOTCA and BNN Bloomberg survey showed that 53% of respondents were concerned about the prospect of higher mortgage payments upon renewal.

While those rate jumps appear to be at an end for now, the Bank’s trendsetting interest rate has surged by 4.5% since March 2022, creating a dramatically different borrowing picture for scores of Canadians whose mortgage is set for renewal in the near future.

Still, that hasn’t resulted in an influx of call from clients concerned about the prospect, according to a Toronto-based mortgage expert. Victor Tran (pictured top) of RATESDOTCA told Canadian Mortgage Professional that he had yet to see a large number of clients pick up the phone to discuss growing worries about higher rates on renewal.

Clients who took out their mortgages in the past year or two, when rates were at their lowest, have been more likely to make contact to discuss concerns – although that’s usually just to explore their options for when or if their mortgage hits the so-called “trigger point” at which payments are no longer sufficient to pay down principal.

“But they haven’t really expressed much concern in terms of running the risk of default or being pressured to sell. For the most part, they’re often doing OK,” he said. “I think it will start to become a major concern come renewal if the rates remain elevated at the current rates, around 5% or so.”

How are lenders adapting?

Lenders are also well aware of those dangers, with many offering borrowers options including extended amortizations to mitigate the risks associated with higher payments. That’s far from an ideal solution, Tran said, but one that’s staving off the threat of a higher number of defaults – at least in the short term.

“I think the lenders are going to do what they can to help these customers out, because I think it’s in their best interest to help them so they don’t default on their loan to continue collecting the interest on these mortgages,” he said. “They are in the business to make money.”

Despite that higher-rate environment, there appears to be little sign of panic among leading lenders. Speaking as First National Financial revealed its earnings for the fourth quarter of 2022, the company’s president and CEO Jason Ellis noted a distinct lack of turbulence in both its variable and fixed portfolios.

“At this point, all of our adjustable-rate borrowers have absorbed their new higher payments with a great deal of resilience,” he said.

Renewal rates for fixed-income borrowers, meanwhile, were consistent with the company’s historical renewal rates – indicating, he said, that “so far, it would seem the Canadian borrower has adjusted well to the new environment.”

How does the Bank of Canada expect borrowers to cope with higher rates?

That said, other recent earnings calls by major Canadian lenders revealed that the percentage of mortgages at or nearing their trigger points are rising significantly. At Canadian Imperial Bank of Commerce (CIBC), for instance, more than 50% of the company’s variable customers are putting the entirety of their payments towards interest, while the Bank of Canada estimated in November that fully half of all variable-rate mortgage holders across the country with fixed payments have already hit their trigger rate.

The central bank said that while a high share of fixed-payment variable-rate mortgages would likely have reached their trigger points this year, that would not necessarily result in higher regular payments, with options including prepayments, refinances, switches to fixed rates, or other changes.

“That being said, for some borrowers, reaching their trigger rate could result in an unexpected increase in mortgage payments,” it added. “These borrowers may need to adjust spending or use savings to meet their higher debt obligations.”

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