The pandemic exacerbated Canadians’ financial vulnerability and sensitivity to rate adjustments
The impact of hikes in the Bank of Canada’s rates will significantly differ between those who originated fixed-rate mortgages with long terms and those with variable-rate mortgages, according to a new analysis by TD Economics.
The report noted that fixed-rate holders will be insulated from the transition to higher rates, while those with variable-rate products can expect interest payments to move in lockstep with policy rates, although these are not expected to rise until late 2022, TD said.
“However, homeowners with mortgages coming due in 2023 are likely to face a much less favourable interest rate environment with benchmark government bond yields close to more ‘normal’ levels,” TD predicted.
TD also estimated that, due to expiring contracts, around 18% and 20% of overall outstanding fixed mortgages will need to be renegotiated in 2022 and 2023, respectively.
“Further, we estimate almost 17% of those outstanding mortgages in 2023 will face higher interest rates than when they were originated,” TD said. “The increase in the qualifying rate effective June 01 from the Bank of Canada five-year benchmark mortgage rate to 5.25% (up from 4.79%) may also present an added complication for some borrowers upon renewal.”
TD said that the pandemic played a major role in making Canadians, especially first-time buyers, more financially vulnerable due to the market’s increased sensitivity to the BoC’s policy rates.
This is “not just due to rapid accumulation of new mortgage debt but also due to riskier characteristics of these mortgages,” TD said. “We find that some factors contributing to a rise in those risks are temporary in nature and should dissipate once housing demand comes off the boil.”
Accelerated consumer spending on high-contact services as the economy gradually reopens will likely pile on another set of risks, TD warned.
“Once lockdown measures are removed there is a chance that consumers splurge on things they were not able to enjoy for a while, such as dining out, entertainment and travelling, leading to a quicker revival of growth in consumer credit,” TD said. “For some home buyers, the transition to higher mortgage rates will raise payments, leaving less room to service consumer debt.”