Canadian Homeowners Brace for Shock Interest Rate Jump as Mortgage Renewals Approach
By Nivedita Balu
Canadian homeowners are facing an unwelcome surprise as they await mortgage renewal notices next month. The recent rise in global bond yields has led to expectations of a significant jump in interest rates, putting additional strain on already tight household budgets.
In Canada, homeowners typically take out five-year mortgages, unlike in the U.S. where customers can secure a 30-year mortgage. This means that many Canadians who locked into sub-2% fixed-rate mortgages five years ago are now preparing for renewal letters with significantly higher interest rates, exacerbated by the recent bond selloff.
Mortgage brokers estimate that renewed home loan rates could reach as high as 7%, resulting in an increase of several hundred dollars per month for the average Canadian mortgage. This comes at a time when Canadians are already struggling to repay their debts due to the high cost of living and rising interest rates.
With approximately $200 billion worth of home loans up for renewal next year, mortgage brokers and lawyers are bracing themselves for an influx of distress sales in the property market.
Many homeowners are seeking advice on how to prepare for their mortgage renewal. Daniel Vyner, a broker at Toronto-based boutique mortgage firm DV Capital, explains, “We’re receiving numerous phone calls from concerned individuals regarding what steps they should take to brace themselves for the maturity date or the renewal of their mortgage.”
Historically, the rate for a five-year mortgage in Canada was around 5.34% in November 2018, while the three-year mortgage was priced at 3.59% in November 2020. However, recent data suggests that these rates will increase significantly at the time of renewal due to the surge in bond yields.
When homeowners receive their renewal notices, they are presented with various options and fresh interest rates based on current market trends. The rise in bond yields, which has driven the Canadian 5-year yield up by 68 basis points since September, reaching a 16-year high of 4.46%, will undoubtedly be reflected in the November renewals.
Mortgage broker Ron Butler explains, “This dramatic rise in bond yields means that when the computer generates the rates for next week, it will use higher rates based on these high bond yields.”
Typically, the major banks contact clients four to six months in advance to outline their renewal options. However, the recent surge in bond yields has led to an increase in fixed-rate mortgages, leaving homeowners with limited options to mitigate the impact.
The potential spike in mortgage rates will further tighten household budgets and worsen the cost of living crisis, which has become a rallying point for many Canadians. Prime Minister Justin Trudeau’s popularity has plummeted in response to these challenges.
Moreover, if the Bank of Canada proceeds with another interest rate hike in the coming months, as predicted by money markets, the mortgage pain could intensify. Analysts believe that the benchmark interest rate, currently at 5%, will remain elevated for an extended period.
In the UK, where homeowners are also preparing to renew their mortgages, bond yields are rising, further adding to the global trend.
One homeowner expressed their frustration on social media, stating, “My previous mortgage rate of 2.6% is now jumping to 6%. I don’t know how people can afford to live in these G7 countries.”
According to Mortgage Professionals Canada, one in five borrowers expects to renew their mortgage in the next year, with this number increasing to over two-thirds over the next three years. This highlights the substantial impact that rising interest rates will have on Canadian households.
Wowa Leads CEO Hanif Bayat estimates that at least 75,000 consumers receive renewal letters each month with revised higher interest rates approaching. He suggests that the surge in bond yields over the past month could result in an average increase of $600 in monthly payments.
One option available to homeowners is re-amortization, which involves extending the repayment period of their loan. However, this may result in higher overall interest costs.
As the renewal dates draw closer, homeowners are growing increasingly concerned. Ron Butler remarks, “I hear worry, consistent, definitive worry.”
