The Bank of Canada (BOC) decided to leave its target rate unchanged at 5.00% recently for many reasons but the biggest one being that a large number of mortgages are coming up for renewal at higher rates.
BOC Governor Tiff Macklem stated,” “One of the important reasons why we held our policy rate at 5% is that we know that those renewals are coming…we know that there’s more to come from what we’ve already done,” Macklem said. “Is there a risk that it bites more than we think? Yes, there is,” he added. “But there’s also a risk that households have some extra savings, they’re able to handle those payments and still consume. So we’re trying to balance those risks.”
Analysts estimate about $251 billion in mortgages will come up for renewal in 2024, with another $352 billion worth in 2025. According to the Bank’s own data, 40% of mortgage holders have already seen their mortgage renew at a higher rate.
Senior Deputy Governor Carolyn Rogers noted consumer surveys and news reports are highlighting some of the extreme cases of stress where borrowers are renewing at significantly higher rates. But she also told the senate committee that the Bank’s data paints a different picture of households so far being able to manage their payments. “When we look at the data that we monitor to see the degree of stress that’s being put on households, certainly there’s pressure and we wouldn’t want to minimize it, but we’re not seeing anything in the data that would suggest that households are under a significant increase in the amount of stress,” she said. She pointed to delinquencies, which, while rising slowly, still remain below pre-pandemic levels.
Rogers added that many homeowners have so far been able to manage higher monthly payments thanks in part to excess savings they had accumulated during the pandemic. “A lot of Canadians are actually paying down their mortgage or taking some of that savings and paying down the mortgage, either in a lump sum or that savings is helping them support higher payments.”
She also pointed to higher wages and the fact that many households have seen the value of their home equity increase as other factors that have helped them deal with higher rates.
Mortgage shoppers and those with upcoming renewals may see some rate relief next week thanks to a steep drop in bond yields. This week alone, the 5-year Government of Canada bond yield slid over 30 basis points to 3.79%. It’s now down more than 60 bps or 0.60% from its recent high of 4.42% reached in early October.
Rate watchers say that should translate into some rate relief by next week given that bond yields typically lead fixed mortgage rate pricing. However, don’t expect any rate drops to match the decline in yields.
What’s driving this latest plunge in yields? In short, each new release of economic data is pointing to a weakening economy, and growing signs that no further rate hikes are on the horizon by both the Bank of Canada and the Federal Reserve. In Canada, we’ve seen headline inflation continue to fall, a slowdown in consumer spending, household credit growth and housing activity, and most recently weakening employment data and a rise in the unemployment rate.
This is all having an impact on rate forecasts. While most big bank forecasts don’t expect the Bank of Canada to begin cutting rates by the middle of 2024, markets are betting a weak economy will force the central bank’s hand a little sooner.
Earlier this week, Deputy BOC Governor Carolyn Rogers confirmed the central bank could start cutting interest rates before inflation reaches its target rate of 2%, which is officially expected by mid-2025, according to the Bank’s latest Monetary Policy Report. “If we get signs that we can be confident that inflation is coming down and will remain down, then we would start thinking about lowering interest rates, but we’re just not there yet,” she said.
On a happier and final note, the October employment data have solidified economists’ calls that no further interest rate hikes are likely.
Sources: CMT, Bank of Canada, Statistics Canada