Canadian mortgage holders are wrestling with progressively higher mortgage payments every renewal period
The ongoing “payment shock” in Canada will place the economy on a wildly divergent path compared to the US this year, according to David McKay, CEO of Royal Bank of Canada.
“The US economy struggled to slow the consumer, [while] the Canadian economy has slowed the consumer quite significantly,” McKay said in an interview with Bloomberg TV earlier this week.
“We’ll technically be in a soft-landing recession early this year,” he noted, adding that Canadian inflation is still “a little bit sticky” around the 3% mark.
McKay cited the two economies’ different mortgage payment terms as a major factor in the trend. He said that Canadian institutions do not offer 30-year fixed mortgage contracts, unlike in the US.
With Canadian mortgage holders needing to renew at prevailing rates every five years at most, McKay said that this set-up has put at risk a significant number of already indebted households, as they will need to wrestle with progressively higher mortgage payments every renewal period.
The Canadian situation is made even more convoluted by the profusion of floating-rate mortgages.
“That’s been challenging for Canadians,” McKay said.
Despite potential threats from defaults, the upcoming mortgage renewal period poses a considerable challenge, with a significant surge in payments.
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 2, 2024
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The impending wave of nearly $1 trillion in mortgage renewals by 2026 represents a significant upheaval in the Canadian financial system, according to a recent analysis by Dylan Smith, senior economist at Rosenberg Research & Associates.
“Given that the vast majority of fixed-rate mortgages and fixed-payment, variable-rate mortgages had locked in low interest rates before or in the early stages of the 2022/23 hiking cycle as consumers shifted away from fully variable mortgages, renewals will force mortgage holders onto much higher average interest rates,” Smith said.
Smith warned that this could potentially trigger a significant surge in average monthly mortgage payments – in turn leading to a “demand shock” that would apply unprecedented levels of pressure not only on the housing market but also on the broader economy.
The volume of mortgages slated for renewal by 2026 represents approximately two-thirds of Canadian mortgages by value, Smith said.
