How worried should mortgage borrowers be about renewing at higher rates?

Despite understandable concerns, specific advice can set minds at ease, says top broker

How worried should mortgage borrowers be about renewing at higher rates?

A wave of mortgage renewals at significantly higher borrowing costs than the initial contract rate is looming – and that’s a reality that could pose significant tail risks to Canadian banks, according to Royal Bank of Canada (RBC).

A recent report by the banking giant, authored by capital markets analyst Darko Mihelic, indicated that around 60% of Canadian mortgages are coming up for renewal in the next three years, with the prospect of an inevitable and “perhaps significant” rise in banks’ credit losses in 2025 and beyond unless rates fall.

Next year could see potential increases of 32% on $186 billion worth of mortgages, RBC said, followed by a possible 33% spike on the renewal of $315 billion worth of mortgages in 2025.

Speaking before a Senate committee last week, Bank of Canada governor Tiff Macklem cited that impending flurry of renewals as a key reason the central bank kept interest rates on hold in its latest policy rate decision.

Chris Allard (pictured top), an Ottawa-based mortgage broker, told Canadian Mortgage Professional that he and his team had been in regular communication with clients about that issue since last year, fielding queries and running through options for when that renewal eventually arrives.

“Our team is proactively calling our clients right now. We’ve been doing that for about a year now – just touching base with the clients that we’ve helped over the last five years to make sure that we can answer some of these questions that people have,” he said.

How can borrowers absorb the shock of higher mortgage costs?

Many clients are uncertain about what awaits them at renewal, Allard said, meaning it’s never been more important to be able to lay out a clear set of eventualities for what may arise at that point.

“For a lot of people, it’s roughly a 30% to 50% increase [in payments] depending on the exact rate they had,” Allard said. “And then we just run simulations to say, ‘OK, well, if the rates today are the rates of next year, then this is what you can expect. If rates are 1% less, then this is what you can expect…’

“We try to have a bit of a cash flow conversation. Part of the conversation is ‘If there’s any additional room, from a budgeting perspective, let’s pretend as though your mortgage payment is 6% and that additional money, let’s be putting that off to the side each month because it’ll just help you get used to that payment that you’re going to face maybe a year from now.’”

No borrower relishes hearing that their monthly payments are likely to spike in the near future – but Allard said that most have their minds put at ease to some degree by having those discussions with brokers and planning ahead for what may come down the line.

“We can’t confirm what rates will be in the future,” he said. “But at least if they run three simulations, they can plan adequately, or as best they can. And even though it’s not necessarily ideal or comfortable for a lot of these people, I think everything will be just fine.”

Other advice around budgeting is also top of mind for borrowers, Allard added. “We try to chat with the same borrowers about their budget right now and how things have been impacted, and try to come up with different ways to save money,” he said.

“Remind them that they probably have subscription that they’re paying for that they probably don’t need, perhaps go through the credit card statements and see if there’s five bucks or $100 that you can save on a monthly basis.”

Rate cuts on the horizon could spell good news ahead for borrowers

The good news for borrowers is that there seems little prospect that interest rates will stay at their current level for a prolonged period, with top economists largely expecting the Bank of Canada to introduce cuts at some point in the second half of 2024.

Reducing the central bank’s current interest rate by 1% wouldn’t blast away borrower pain completely, RBC’s Mihelic added – but it would cut the 2024 and 2025 payment shock to a more manageable level of around 22% or 23%.

Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.