Wednesday’s expected Bank of Canada (BoC) interest rate cut would move the country’s economy further away from a damaging mortgage renewal price shock that many economists once feared, but the renewal process will still leave many Canadians under financial pressure.
The pace and scale of the BoC’s cuts to its overnight rate — along with a number of other factors — have reframed economists’ worries over the past months. The scenario of Canadians renewing their mortgages at rates starkly higher than those of the early pandemic era has become “a micro not a macro story,” CIBC economists Benjamin Tal and Katherine Judge wrote in a recent note.
At this point, Tal and Judge estimate that the monthly average mortgage payment in 2025 will rise by just 2.5 per cent for renewals, meaning fears of a “negative macro impact” are now “overblown.”
Their models forecast positive outcomes for a considerable proportion of renewals, but also a meaningful number of people will still be on the wrong side of the average. Around 40 per cent of mortgages up for renewal in 2025 “will see de facto lower monthly payments,” Tal and Judge say, and around 10 per cent would see their payments increase by less than 10 per cent.
The remaining 50 per cent are “facing an average 20 per cent more payment shock,” the economists say. What this means, say Tal and Judge, is rather than fixating on macroeconomic consequences, “the focus should be on the micro space in terms of the potential increase in delinquency rates.”
Rising delinquency rates, along with declining per-capita spending figures, are “testament to the challenges faced by Canadians in the past couple of years,” a recent TD Economics report noted. Those figures are complemented by a litany of sentiment surveys that suggest Canadians’ financial flexibility is minimal.
The TD report also points out that homeowners have largely shown resilience despite difficult times. “The recent rise in delinquencies is largely driven by non-mortgage credit products — such as auto loans and credit cards,” the report said.
There are a few reasons why the proportion of people facing a greater mortgage shock isn’t as high as feared, beyond the steady pace of the BoC’s cuts. For one, many mortgage-holders opted to “front-load the payment shock” by moving from a variable to a fixed-rate mortgage, the TD report notes. “We estimate that of the $520 billion in variable-rate mortgages held at chartered banks at the end of 2022, 14 per cent switched to fixed-rate mortgages or were prepaid,” the report said.