Canadian Mortgage Renewals Potential 48 Percent Payment Shock Looms by 2026 Analyst Warns
Image by: unsplash
RBC Capital Markets analyst Darko Mihelic has warned that by 2026, when $400 billion worth of mortgages are set to renew in Canada, monthly payments could increase by as much as 48 percent, particularly affecting negatively amortizing loans. Mihelic also predicts lower payment shocks of 32 percent in 2024 and 33 percent in 2025 as significant amounts of mortgages come up for renewal. The situation could improve if the Bank of Canada's overnight rate decreases by 100 basis points, which would reduce the payment shock in 2024 and 2025 to around 22 or 23 percent.
The most substantial challenge is expected in 2026, when a significant portion of variable-rate mortgages with fixed monthly payments is set to renew. These borrowers have been making consistent monthly payments as interest rates have risen, but in many cases, they are only paying interest each month, extending the loan's duration, known as negatively amortizing. Variable-rate mortgagors could face a significant payment shock, potentially as high as 84 percent in 2026 if interest rates do not decline.
To mitigate payment shock, the Bank of Canada's overnight rate would need to fall to 0.25 percent by July 2026, which is currently seen as an unreasonable expectation. This situation presents challenges for Canadian banks' retail businesses, impacting revenue growth, mortgage delinquency, and losses on other credit forms. However, Canadian banks are taking proactive steps to reduce payment shock for their customers, working with them to increase monthly payments, make lump-sum payments, extend loan terms, or switch to fixed-rate loans.
Read the full article on: FINANCIAL POST
