Yahoo Finance Pressure on BoC to cut rates and avoid mortgage payment shock: Desjardins
More homeowners are heading for payment shock upon renewal as rates stay higher for longer
It will largely be up to the Bank of Canada to help prevent serious payment shock for some variable-rate mortgage holders who will be renewing in the next couple of years, according to a new report from Desjardins.
"In short, there will be pressure on the Bank of Canada to push rates to low levels in 2025 to prevent a subsector of mortgage holders from running into serious financial difficulties. That reinforces the importance of getting inflation under control soon," Royce Mendes, managing director and head of macro strategy at Desjardins, said in a note to clients on Thursday.
With interest rates expected to stay higher for longer, the number of mortgage holders, particularly variable-rate borrowers, that could be hit with sticker shock upon renewal is increasing.
The key takeaway then is that the Bank of Canada can alleviate much of the pain in 2025 and 2026 by cutting rates more than what’s currently being priced by marketsRoyce Mendes, Desjardins
"The most critical factor determining the payment shock for mortgages isn't the path for interest rates, but rather the prevailing rate at renewal," Mendes said.
His calculations estimate two-thirds of a variable-rate mortgage payment increase is due to the higher rate at renewal, while the remaining one-third is because of the build-up of the principal during the life of the loan.
In May, an Angus Reid poll found 77 per cent of homeowners, regardless if they had a fixed or variable rate, were worried about their upcoming mortgage renewal.
Many financial institutions, including most of Canada's biggest banks, have allowed variable-rate mortgage amortizations to lengthen by decades to help borrowers cope with higher rates.
On Wednesday, the Financial Consumer Agency of Canada, a financial consumer watchdog, issued guidelines telling lenders to support customers who are struggling with rising mortgage payments, adding it would monitor lenders' compliance with its expectations.
The Bank of Canada is expected to hike its benchmark rate by another quarter-point next week, according to market consensus, which would bring its overnight rate to five per cent. It also shows rate cuts are expected to come at a much slower pace in 2024 than previously thought because of the continued resilience of the economy.
Mendes estimates that every one-percentage-point rate cut from now until 2025 would lower payment shock by about 11 per cent for variable-rate borrowers. That number would grow to 13 per cent for mortgages renewing in 2026.
"The key takeaway then is that the Bank of Canada can alleviate much of the pain in 2025 and 2026 by cutting rates more than what's currently being priced by markets," he said.
"Should central bankers be able to tame inflation in the near term, they can then shift their focus back to macroeconomic stabilization in the years ahead."
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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