Surging bond yields add to Canadian homeowners' mortgage pain as renewals loom
07/10/2023 11:00
By Nivedita Balu
TORONTO, Oct 7 (Reuters) - The roughly 75,000 Canadian
homeowners awaiting mortgage renewal notices next month are
bracing for a shock interest rate jump due to a surprise global
bond rally, which will further squeeze already tight household
budgets.
In Canada, homeowners can take out five-year mortgages,
unlike in the U.S. where customers can snag a 30-year mortgage.
This means many Canadians who locked into sub 2% fixed-rate
mortgages five years back are preparing for renewal letters with
a steep rise in interest rates, made worse by the bonds rally.
In some cases, renewed home loan rates could reach 7%, which
would push up the average Canadian mortgage by at least a few
hundred dollars per month, mortgage brokers estimate.
Canadians are already struggling to repay their debts amid
high costs of living and rising interest rates. That has forced
banks to put aside money in case of defaults, weighing on their
overall profits.
With roughly about C$200 billion ($146.36 billion) in home
loans coming up for renewal next year, mortgage brokers and
lawyers are preparing for more distress sales in the property
market.
"We're having a lot of phone calls about people with
concern... (about) what they should be doing to brace themselves
for the maturity date, or the renewal of their mortgage," said
Daniel Vyner, a broker at Toronto-based boutique mortgage firm
DV Capital.
The rate for a five-year mortgage was about 5.34% in
November 2018 and the three-year was priced at 3.59% in November
2020, according to data compiled by financial data firm Wowa
Leads.
Homeowners receive a notice four to six weeks before their
renewal date as lenders hatch out various options with fresh
interest rates based on market trends at the time of renewal. A
global move in bonds yields that has pushed the Canadian 5-year
yield up by as much as 68 basis points since early September, to
touch a 16-year high on Tuesday at 4.46%, will likely be
reflected in the November renewals.
"This dramatic rise in bond yields means that when the
computer chugs along and sets up the rates for next week, they
will be using higher rates based on these high bond yields,"
Toronto-based mortgage broker Ron Butler said.
The big banks generally contact clients four to six months
in advance outlining renewal options.
Variable home loans, which accounted for roughly half of
Canada's outstanding mortgages from July 2021 to June 2022, were
already rising in tandem with the Bank of Canada's record pace
of interest rate hikes. The country's mortgage debt stands at
C$2.1 trillion, as of January of this year, according to Canada
Mortgage and Housing Corp.
Now the fixed-rate mortgages, driven by bond yields, are
rising as well leaving homeowners nowhere to hide.
A sharp jump in mortgages would further tighten household
budgets and aggravate the cost of living crisis which has become
rallying point for many Canadians. Prime Minister Justin
Trudeau's popularity has plunged in opinion polls in response.
And the mortgage pain could grow if the Bank of Canada
raises its benchmark interest rate one more time over the coming
months as money markets expect, from the current 5%, and likely
to stay higher for longer, analysts say.
One homeowner said on X social media platform that his
previous rate of 2.6% is now jumping to 6%. "I don't know how
people can afford to live in these G7 countries."
One in five borrowers expect to renew their mortgage in the
next year, jumping to more than two-thirds over the next three
years, according to Mortgage Professionals Canada.
Hanif Bayat, CEO of Wowa Leads, estimates that at least
75,000 consumers receive these letters every month with revised
higher interest rates as their renewal approaches. He suggests
that the spike in bond yields over the past month could on
average add C$600 in monthly payments.
One step homeowners could take is re-amortization, brokers
said, which means increasing the number of years they would take
to repay their loan.
"I hear worry, consistent, definitive worry," Butler said.
($1 = 1.3665 Canadian dollars)
(Reporting by Nivedita Balu in Toronto
Additional reporting by Fergal Smith
Editing by Denny Thomas and Josie Kao)
((Nivedita.Balu@thomsonreuters.com; Twitter: @niveditabalu;))