A new report from the Canada Mortgage and Housing Corporation (CMHC) warns that over one million Canadian homeowners will face significantly higher mortgage rates when renewing in 2025. Approximately 85% of these fixed-rate mortgages were originally contracted at a time when the Bank of Canada’s rate was at or below 1%. This surge in renewals is expected to impact 1.2 million fixed-rate mortgages in 2025 and an additional 980,000 in 2026.
Impact of Higher Interest Rates
As these mortgages come up for renewal, most will face higher rates compared to when they were originally signed. Currently, the Bank of Canada’s key rate stands at 3.75%, a significant increase from the near-zero rates when many of these loans were taken out. Economist Michael Davenport of Oxford Economics suggests that this wave of renewals may lead to a spike in home listings, as financially stressed homeowners may be forced to sell. He predicts a faster rise in resale market listings during late 2024 and early 2025, particularly as renewed mortgage guidelines and gradually lowering interest rates stimulate housing demand by mid-2025.
Challenges in the Private Lending Sector
The report highlights growing concerns in the private lending sector, where defaults and foreclosures are already rising. Private lenders, who often charge higher rates and operate with fewer regulations, are seeing an increase in distressed sales. In Q2 of 2024, the default rate for single-family homes reached 5%, up from 1.7% in Q4 of 2022, with foreclosures rising to 3.5% from 1.3% over the same period.
Market Resilience Amid Tight Conditions
Despite these challenges, the tight and liquid real estate markets in cities like Toronto provide homeowners with options to avoid foreclosure by selling their properties relatively quickly at substantial prices. CMHC’s Deputy Chief Economist, Tania Bourassa-Ochoa, noted that many in the alternative lending space are choosing to sell rather than face financial hardship.
Delinquency Rates and Economic Outlook
The overall mortgage delinquency rate continued to rise slightly in the first half of 2024, reaching 0.19%, up from a record low of 0.14% in 2022. Although this rate remains below the pre-pandemic level of 0.28% seen in 2019, there are concerns that other forms of debt, such as credit cards and auto loans, are showing increased delinquency rates. These could serve as early indicators of further mortgage defaults, suggesting that the trend might continue into 2025.
Relief Through Rate Cuts
However, there may be relief on the horizon. The Bank of Canada began its rate-cutting cycle in June 2024, with the current key rate now at 3.75%, down from a peak of 5%. Additional cuts are expected before the end of the year, which could ease the financial burden for those facing mortgage renewals in 2025. Economist Davenport warns that without these cuts, the economy could have faced a sharp rise in defaults and a potential deep recession. “Rapid rate cuts are helping guard against that risk,” he said.
Additional Insights
The CMHC report emphasizes that rising living costs and increased debt servicing have strained household budgets, leaving many homeowners vulnerable.
Experts are watching the trend of rising delinquencies in other sectors, which could hint at broader financial challenges ahead for homeowners.
The banking sector, despite these challenges, remains optimistic, with some officials noting that homeowners have managed mortgage payment increases better than expected.
Sources:
Clarrie Feinstein, Toronto-based business reporter at the Star (clarriefeinstein@torstar.ca)
CMHC report (Released November 13, 2024)
