Roughly 40% of the outstanding stock of mortgages will have already renewed at higher interest rates by the end of 2023.
RDNE Stock project
But past interest rate increases of 2022/23 will continue to echo into 2025 and 2026 as a wave of 4- and 5-year fixed rate mortgage contracts originated at exceptionally low interest rates during the pandemic renew. Approximately $400 billion worth of mortgages are set to renew in 2025, a large portion of which (about $275 billion) are 4- or 5-year contracts that will be renewing at substantially higher rates, says RBC Economics.
“Still, the actual payment impact from those increased mortgages is manageable – around $4 billion, or roughly 0.3% of current household disposable incomes – as long as the Bank of Canada is able to begin cutting interest rates next year (as is now widely expected) and the economic backdrop is improving,” said the report by RBC Economics.
“While the number of mortgages renewing in 2025 is large, the payment shock associated with those renewals is smaller.
“Rising conviction in markets that the Bank of Canada will need to pivot to interest rate cuts in the year ahead have already pushed 5-year government bond yields down a full percentage point from peak levels earlier in the fall – and all else equal, lower government rates mean lower interest rates for other fixed rate lending rates across the economy, including mortgages.
“Our own interest rate projections still imply 4- and 5-year fixed rate mortgages renewing at about 2 to 2 1/2 percent higher in 2025 – resulting in a payment shock of 20% to 30% for those borrowers, all else equal. But the total dollar amount of the increases still looks like a ‘manageable’ headwind for the broader economic backdrop.”
RBC said Canada’s mortgage market is highly regulated and borrowers need to qualify for loans at interest rates well above contract rates to ensure resilience to exactly this kind of renewal shock.
“Households borrowing at the low rates of 2020 still had to qualify at rates substantially higher than their lending rates (either 2 percentage points above the actual lending rate or the Bank of Canada posted rate, which never fell below 4.79% in 2020.) Most mortgages could still be renewing at below those ‘stress-tested’ levels in 2025 if the Bank of Canada cuts interest rates as expected,” it said.
“Essentially all mortgage renewals across all contract durations since mid-2022 have been at higher rates. But by 2025, a wave of shorter-duration (1-3) year mortgages worth roughly $70 billion will also be renewing at lower interest rates.
“The impact of variable-rate mortgage renewals is difficult to predict (the amount that payments adjust when interest rates change in variable rate mortgages varies by bank, and variable rate mortgages can typically switch to fixed rate contracts relatively easily.) But there will also be a large chunk of variable rate mortgages seeing lower payments as the BoC pivots to cuts.”
With the BoC expected to begin easing off the monetary policy brakes next year, RBC expects the unemployment rate will be drifting lower in 2025 and house prices will still be high. Labour income will be growing (alongside still rapid population growth) and households will have accumulated additional equity in their homes. It said it expects Canadian GDP will still strengthen modestly in 2025 on balance with the unemployment rate drifting lower.
Mario Toneguzzi
Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list
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