2023-11-01 04:00:00
Holders of adjustable-rate mortgages might see their payments increase by 84% by 2026, and only a drop in interest rates might “save” them, notes the Royal Bank in a report.
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In the country, 60% of mortgage loans are expected to be renewed over the next three years, for a value of $400 billion. In many cases, the renewal will be at a much higher interest rate than previously negotiated, which will cause mortgage payments to jump.
On average, the increase in monthly payments might reach 48%, writes RBC Capital Markets analyst Darko Mihelic in a recent report.
But a category of borrowers in particular, who have a variable rate mortgage, will suffer the biggest repayment “shock”, according to the analyst. Their payments might nearly double, increasing 84% by 2026, if interest rates do not fall.
Most of these loans have balances that are increasing instead of decreasing at this time (this is called negative amortization). These borrowers have been making the same monthly payments for years, but since interest rates are rising, they are now only paying interest each month, extending the time it would take them to repay their loans.
Banks also at risk
The situation also presents a real risk for Canadian banks. “Unless there is a significant decline in interest rates, we believe credit losses will inevitably increase, perhaps significantly in 2025 and beyond,” writes the RBC analyst.
In 2024, more than $186 billion in mortgage loans will be renewed, according to RBC. At current interest rates, the average payment “shock,” or increase in monthly payments for borrowers, would be 32%.
The following year, $315 billion in loans will be renewed in Canada, this time with many more variable rate mortgages. The average payment shock will also be around 33%, according to the bank.
Finally, 2026 mortgage renewals feature the largest proportion of variable rate mortgages and therefore the payment shock might reach 48% on average. This is in a scenario where rates do not fall significantly.
Mortgage bomb
Last October, a former deputy governor of the Bank of Canada warned of the danger awaiting the Canadian real estate market. The renewal of mortgages threatens the economy, said Paul Beaudry at Journaland interest rates are too high to justify current home prices.
“The danger facing the economy is that many people took out five-year mortgages in the time of COVID, at rates as low as 1.5%. When they renew, their mortgage payment will jump, since current rates are around 6%,” he said.
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