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Posthaste: Canadians brace for mortgage renewal cliff that could hike payments by 70%

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housing-market-1204-ph

The holiday spending season is upon us, and poll after poll reveals that this year Canadians are keeping a tighter grip on their wallets.

More than half of Canadians say they will spend less on the holiday this year and 61 per cent have cut back on discretionary spending overall in recent months, says a recent survey by the Angus Reid Institute.

Inflation, though it has eased significantly, continues to be a drag, but for many Canadians another financial worry is looming on the horizon.

“Instead of the Grinch, it could be mortgage renewals that steal Christmas this year,” said Royce Mendes, head of macro strategy at Desjardins.

Signs are mounting that Canadians are hunkering down for a tough time ahead.

Over the past year, term deposits at Canadian banks have risen more than 40 per cent to a total of $175 billion, said Mendes in his note.  According to recent data, Canadians saved 5.1 per cent of their disposable income in the third quarter, higher than the average of 2.4 per cent between 2015 and 2019.

At the same time the volume of household credit is declining. Adjusted for inflation, consumer credit fell by 1 per cent in the year to September, National Bank economists estimate. The last time that happened was in the 1990s recession when the prime rate was 14 per cent.

“Canadians are spending less to save more,” said Mendes. When you take out auto sales, which are catching up after a long supply disruption, retail sales are only 1.2 per cent higher than a year ago, a much slower pace than the average 3.5 per cent growth seen before the pandemic.

Spending looks even worse when Canada’s population surge is taken into consideration. Household per-capita spending in the second quarter was down 1.4 per cent from the year before, the largest decline since the 2008/09 recession aside from the pandemic lockdowns, said Carrie Freestone, an economist at the Royal Bank of Canada.

Meanwhile, south of the border, the consumer is still going strong. Per-person spending in the United States is almost 2 per cent higher than a year ago and well above pre-pandemic levels, said Freestone.

Unlike Canadians, Americans appear more willing to spend their pandemic savings, which have shrunk to 3.5 per cent of gross domestic product from nine per cent at their peak two years ago, she said.

One reason for this is how mortgages work in America. In the U.S. the typical length of a mortgage is 30 years, while in Canada the term is usually five years or less. Early in the pandemic during a mortgage refinancing boom, many U.S. households locked into a low rate that will last decades.

Canadians are not so lucky. A recent report by Royal LePage estimated that over three million Canadians will have to renew their mortgage in the next 18 months, most at significantly higher rates. Nearly three-quarters of those facing this hurdle said they were worried about the financial hit.

In its earning release last week, Canada’s largest bank RBC revealed that nearly three quarters of its mortgage portfolio is coming up for renewal over the next three years, reports Canadian Mortgage Trends. 

About 90 per cent of those due in 2024 and 2025 are fixed-rate mortgages with interest rates between 3.1 per cent and 3.6 per cent. Rates offered now by big banks range from 5.8 per cent to 7.5 per cent, said Mortgage Trends.

If markets are right about the path of interest rates, the hardest-hit borrowers could see their monthly mortgage payments increase by as much as 70 per cent, said Mendes.

Concerns about the mortgage renewal cliff recently prompted Canada’s federal government to introduce guidelines for banks to ease the blow. The “mortgage charter,” which is non-binding, includes measures such as temporarily extending amortization periods, ending a stress test when switching lenders and allowing lump-sum payments to avoid negative amortization without penalty.

Lump-sum payments at renewal would reduce the rise in payments, said Mendes, “but the numbers are huge.” For example, a homeowner who bought an average-priced home in Toronto during the pandemic with a 20 per cent down payment would need to come up with between $80,000 and $200,000 to keep their monthly mortgage payments the same, he said.

“The daunting prospect of higher monthly mortgage payments, longer amortizations, large lump-sum payments or some combination of them is clearly weighing on the minds of many Canadians,” wrote Mendes.

“It’s not hard to believe that Canadians with looming mortgage renewals are getting their financial houses in order before the coming storm.”

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A better-than-expected jobs gain in November masks a weakening economy, say economists. Canada added 25,000 jobs, data showed Friday, but the unemployment rate rose to 5.8 per cent because the country’s population is growing faster than jobs are being created. Statistics Canada’s report also showed that a higher number of those unemployed people were laid off.

“All in all, gone are the days when the labour market was described as tight, with the unemployment rate rapidly approaching the equilibrium unemployment rate, which we estimate at around 6 per cent,” said National Bank economists Matthieu Arseneau and Alexandra Ducharme in a note after the data came out.

“With central banks seemingly unwilling to reverse their policies soon, and given the time lag between interest rate hikes and their impact on the economy, the risk of inflicting too much damage on the labour market remains whole.”


  • Watch for home sales data in Canada’s biggest cities this week. Vancouver home sales for November are expected Monday and Toronto’s Tuesday.

  • Michael Medline, chief executive of Empire Company Ltd., which owns Sobeys, will appear before the House of Commons agriculture committee studying efforts to stabilize the price of groceries.

  • Today’s Data: U.S. factory orders, durable goods orders

Get all of today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.




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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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