Mortgage costs have surged by 29.9% as more borrowers renew, according to Statistics Canada’s latest consumer price index.
Mortgage interest drove inflation to 3.4% last month which would have been 2.5% if it were excluded.
According to Daniel Johanis, owner of Pekoe Mortgages, there’s no relief in sight as mortgage rates are slated to remain elevated until around 2026. Although fixed-rate mortgage holders have been shielded from rising mortgage rates, unlike variable-rate holders, their renewal rates will be significantly higher at the conclusion of their current terms.
“Mortgage rates were at 2% and now they’re higher at 5-6%, and borrowers have to make an adjustment, but it’s being compounded by other things if we look at the cost of living, which has gone up in every possible way,” Johanis told True North.
“Some people anticipate it will be even more difficult in the coming years, so they’re redoing their fixed-rate mortgages now. By doing early renewals, because they’re stress tested at 2% over the contract rate, now’s a better bet to qualify them on a five-year fixed because it’s the lowest mortgage product out there at the moment.”
The Bank of Canada (BoC) has been increasing its Overnight Lending Rate since March 2022 in an effort to bring inflation down to its 2% target, but as BoC governor Tiff Macklem explained in May, it will continue putting pressure on Canadian households.
“We expect it will hit 3% this summer. We are encouraged by this progress but we expect getting inflation from 3% to 2% is going to be more difficult,” he said. “Our current projection only has that happening by the end of 2024.”
Johanis says the BoC’s pandemic policy of quantitative easing, which resulted in an overnight rate of 0.25% for roughly a year and a half, created a false perception that ultra-low interest rates were the rule rather than the exception and people went on shopping sprees for homes.
Macklem has also admitted that the Liberal government’s massive stimulus spending programs during the Covid-19 pandemic went on too long and contributed to inflation.
But now that interest rates are going back up, Canadians’ monthly mortgage payments are increasing significantly and putting strain on household budgets. That will only get worse as two-thirds of mortgages in Canada are due for renewal in the next couple of years.
A consequence of the rising interest rate environment is borrowers risk defaulting on their mortgage payments. Johanis noted that the rate of mortgage defaults is historically low in Canada, but he anticipates investors will have a hard time.
If Airbnb’s declining revenues are any indicator, it has already begun, especially since short-term rentals yield higher returns on investment than putting units in the long-term rental pool.
But it’s aspiring first-time homebuyers, who have struggled for years to get a foothold in the property market, who will have the most difficulty going forward, says Johanis.
“I’ve seen more people purchase homes as two or three friends together who were roommates and got help from the bank of mom and dad to help out with the down payments,” he said. “I’ve already done five of these mortgages and it’s only six months into this year. That’s already more than I’ve ever done before.”
