As a wave of mortgages are set to renew over the next two years many Canadian homeowners are fearing the worst. Canadian banks have approximately $2 trillion in residential mortgages on their books, and most of those renewing are looking at higher interest rates. The prospect of higher interest rate mortgages is scary sounding for a lot of Canadian homeowners.   

However, with interest rates coming down borrowing costs are dropping quickly, and the jobs market has slowed; the pent-up fear of mortgage rate resets has begun to subside. “Reset, schmeset,” said Scotiabank economist Derek Holt. He called it an “overstated shock from the beginning” comparing rates from when they were dirt cheap, to now being back in line with historical averages.  

Bank executives also have high faith in Canadian consumers; households have been both saving and cutting back on discretionary spending. They claim the new r word isn’t “recession,” it’s “resilient.” And despite the likely increase in delinquencies and other stressors, bankers aren’t expecting a huge spike in bad loans. “There’s a lot of concern about defaults and losses in mortgages. That hasn’t happened,” Tayfun Tuzun, Bank of Montreal’s chief financial officer, said at a Barclays conference this week. “And with easing interest rates after three cuts and probably the expectation of more cuts coming, the pressure that was coming through negative amortization, etc., that’s all easing.”  

The real problem for these borrowers – many of whom took out large mortgages relative to their incomes in 2021 and 2022 – is what will happen at renewal time. Referencing back to the negative amortization, the loans must be brought back to the contractual amortization period, typically 25 or 30 years. This means the payments will be much higher, hence the “mortgage wall.” But the number of people that are facing that wall has dropped. The banks that offer these types of loans have worked with their clients to make lump-sum payments to reduce their balance – or, potentially, to sell. In August, the number of listed properties was 46% higher than a year earlier. 

Unfortunately, the next few years won’t be completely pain-free, as millions of borrowers have yet to face their renewed payment amounts which have been fixed for the last five years.  

CIBC economist Andrew Grantham wrote this week that his bank’s forecast is an eye-catcher, expecting 50-basis-point cuts in December and January, and for the overnight rate to slide to 2.25% next year. This would be a huge relief for the many homeowners facing the mortgage wall of worry in the next couple of years. (Fingers crossed!)    

Have a great weekend, 

Tracey and Paige  

Source: https://www.bloomberg.com/news/newsletters/2024-09-13/canada-mortgage-wall-looms-some-call-it-overblown-bay-street-edition  

Photo by Blake Wheeler on Unsplash

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