CMHC warns of “interest rate shock”

The Canada Mortgage and Housing Corporation (CMHC) has issued a warning about a significant “interest rate shock” for many Canadians with fixed mortgages due for renewal in the coming years.

Approximately 300,000 homeowners have already faced notably higher payments upon renewing their mortgages at increased interest rates. CMHC researcher Tania Bourassa Ochoa predicts a potential increase of 30 to 40 percent in mortgage payments for these renewals, especially for those mortgages renewed earlier this year.

“In 2024 and 2025, an estimated 2.2 million mortgages will be facing interest rate shock, representing 45% of all outstanding mortgages in Canada,” the agency said in a November 9 report. Most of these borrowers contracted their fixed-rate mortgages at record-low interest rates and, most likely, at or near the peak of housing prices around 2020 – 2021. This holds true for both households who took out a mortgage when buying their new home. It also applies to the numerous existing homeowners that used the increased equity on their property by refinancing and taking cash out for consumption. The total amount of mortgage loans to be renewed during this period represents over $675 billion, which represents close to 40% of the Canadian economy (2022 Gross Domestic Product).”

This situation represents just the beginning of a broader trend, as nearly one-third of Canadians have variable mortgage rates and are already experiencing higher interest rates. Looking ahead to 2024 and 2025, it’s expected that up to 2.2 million mortgage borrowers will be renewing, accounting for 45 percent of all outstanding Canadian mortgages. These individuals, who originally contracted their mortgages at record low-interest rates and during peak housing prices, are anticipated to face the most severe impacts of the interest rate hikes, amounting to an additional collective payment of $15 billion.

Furthermore, while the rate of delinquencies on mortgage payments remains historically low, CMHC notes a rising trend in delinquencies related to other household debts like credit cards, auto loans, and lines of credit. This increase suggests that many consumers are struggling to manage their debts, adding more financial pressure on Canadian households and potentially putting them at greater risk.

The CMHC, however, says it well positioned to sustain potential mortgage defaults.

“Default insurance is mandatory for mortgages where the borrower’s down payment is less than 20% of the purchase price. It provides lenders with insurance against borrower defaults while allowing borrowers with smaller down payments to obtain mortgage loans at competitive interest rates. Reduced risk ensures the availability of mortgage funding to homebuyers with lower levels of equity during an economic downturn, as the availability of mortgage credit is often reduced. This provides added stability to housing and financial markets,” it concluded.