Adjustable rate mortgage holders could increase their payments by 84% by 2026 and only a fall in interest rates could “save them”, Royal Bank finds in a report.
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The country is expected to see 60% of its $400 billion mortgage loan renewals over the next three years. In many cases, the extension occurs at a much higher interest rate than previously negotiated, resulting in a jump in mortgage payments.
On average, the increase in monthly payments could reach 48%, writes RBC Capital Markets analyst Darko Mihelic in a recent report.
But one category of borrowers in particular who have a variable rate mortgage will suffer the biggest repayment “shock,” according to the analyst. If interest rates don’t go down, their payments could almost double and increase by 84% by 2026.
Most of these loans have increasing balances at this point rather than decreasing balances (this is called negative amortization). These borrowers have been making the same monthly payments for years, but as interest rates rise, they now only pay interest each month, extending the time it would take them to repay their loans.
Banks are also at risk
The situation also poses a real risk for Canadian banks. “Unless there is a significant decline in interest rates, we believe that loan losses will inevitably increase, perhaps significantly in 2025 and beyond,” writes the RBC analyst.
According to RBC, more than $186 billion in mortgage loans will be rolled over in 2024. At current interest rates, the average payment shock, or increase in monthly payments, for borrowers would be 32%.
The following year, $315 billion in loans are renewed in Canada, this time with many more variable-rate mortgages. The average payment shock will also be around 33%, according to the bank.
Finally, mortgage extensions in 2026 have the largest share of variable rate mortgages, so the payment shock could reach an average of 48%. This happens in a scenario where interest rates do not fall significantly.
Mortgage bomb
Last October, a former deputy governor of the Bank of Canada warned of the danger facing Canada’s real estate market. Mortgage renewals are threatening the economy, Paul Beaudry told the Journal, and interest rates are too high to justify current property prices.
“The danger to the economy is that many people have taken out five-year mortgages at interest rates as low as 1.5% during COVID. If they renew, their mortgage payments will jump as current interest rates are around 6%,” he said.
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