Canada

Bank of Canada: Half of Canadian Real Estate Mortgages Will Renew By Next Year

Bank of Canada - Half of Canadian Real Estate Mortgages Will Renew By Next Year

Canadian real estate now presents one of the biggest risks to the financial system, but it may not as bad as it sounds. The Bank of Canada (BoC) released its quarterly assessment of financial risks to the banking system, and near the top was household mortgages. BoC analysts expect half of mortgage rates will “reset” over the next year, mitigating much of the risk. Highly indebted households still present a significant risk however.

Interest Rate Resets

More than half of residential mortgage holders are expected to have their mortgage “rate reset.” Over the next year, 47% of mortgage holders will need to renew their mortgages. In the next 1 to 3 years, they expect another 31% of mortgages to renew. The other 22% will renew in over 3 years. So there’s different layers of risk, let’s take a look at how rates would impact these borrowers.

The Debt Is “Manageable For Most”

The BoC believes the renewals would be “manageable for most.” Specifically, they cited higher income, and more home equity at the time of renewal to be mitigating factors. Additionally, if you renew in the next year, there’s a good chance you’re locking in rates better than you did 5 years ago. More equity, higher income (hopefully), and lower rates are a likely scenario for almost half of the country’s borrowers.

Source: Bank of Canada.

Highly Indebted Borrowers Are Still A Risk

This is where the financial risk to the banking system lays according to the BoC. Highly indebted borrowers, those with mortgage debt 450% or more of their annual income, have a “typical” mortgage of $360,000, and $63,000 of gross income. A 1% increase in mortgage rates would result in an increase of $180 per month to service that debt. That may not seem like a lot, but would consume an additional 3.5% of income from these borrowers. The ability for these folks to absorb a rate hike is the primary issue.

Now they did a typical highly indebted borrower, and didn’t breakdown Toronto and Vancouver markets. Fortunately, National Bank of Canada (NBC) economists broke those numbers down for us last week. In Toronto, a rise of that size would consume an additional 8.29% of a median household gross income. In Vancouver, a rise of one percent would consume an additional 9.23% of the median household income. Canada’s two largest economic engines have the highest risk of exposure.

The interesting thing is where the BoC is saying the risk is primarily mitigated. Those that are about to have their mortgages reset, likely bought before the parabolic home price spikes in Toronto and Vancouver. However, as NBC economists are pointing out, those that bought recently in Toronto and Vancouver present a significant risk. Highly indebted households are more heavily concentrated in Toronto and Vancouver. In the event that rates rise, we would need to see a huge jump in income for most households. There’s only one problem, that’s not how things work after a huge jump in real estate prices.

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18 Comments

  • Reply
    Allen 2 weeks ago

    Well….It was a pretty good 5y run.

  • Reply
    Mike 2 weeks ago

    People with 450% debt-to-income ratio need to be removed from the market ASAP! Same for speculators and “rental income” dreamers.

    As prices keep falling, B20 is implemented and interest rates go up, they will all get burned severely. The Bank of Canada does not want to start a mass panic, they diluted the true risks. You just have to analyse all the data out there to realize that GTA prices have a long way down to go until they normalize to basic financial fundamentals.

    • Reply
      bluetheimpala 2 weeks ago

      You mean an average HHI of $160K+ to afford even a basic house in the suburbs isn’t sustainable? Say it ain’t so!

  • Reply
    Gregory 2 weeks ago

    What if rates go down ?

    • Reply
      MH 2 weeks ago

      What if Santa gives everyone an interest-free mortgage this year?

      Oh wait, I have a better forecast. What if everyone buys a lottery ticket and wins a jackpot so we can keep this party going? Sounds reasonable, let’s use it as a baseline…

      • Reply
        Tommy 2 weeks ago

        It’s entirely possible for rates to do down again, or remain unchanged for awhile…

        • Reply
          Rick J 2 weeks ago

          Based on what exactly? If you know what is happening, the US dollar is collapsing. Housing is a massive bubble. It’s down 7 months in a row. You think they’re gonna drop interest rates?? Please explain your rational, or is it just your uneducated opinion?

        • Reply
          Kelso 2 weeks ago

          There’s no way that rates will be going down anytime soon. One factor that hasn’t even come into play yet that will be rolling out in the next 1-2 years is the insurer risk sharing with lenders as per last October’s mortgage rule changes. And who will that cost inevitably go to? The borrower, via mortgage rates. And it will depend on the LTV as well, insured and especially insurable conventional purchases and transfers will take the heaviest hits on tiered higher interest rates according to back end costs. Could also be impacted by beacon scores as well. We have a number of BoC rate increases scheduled for the new year, lenders are all aware we are in a rate increasing environment for 2018. Then add 2% to that for qualifying, going to make things pretty tight for a lot of people and may trap them with existing lenders. Though I think lenders will still be competitive on renewal rates, given changes from last year and how costly conventional money is for them they’ve had to drop their pants on high ratio rates to show business on books with incredibly tight spreads for profit (most of which they make at time of renewal on a mortgage). Much lower costs for retention than new business given how costly the new money is to lend. It’s going to be an interesting year, that’s for sure.

  • Reply
    Oliver Clozof 2 weeks ago

    What if foreigners sustain current prices seeing any loss in market value as a discount to prices that are heavily analyzed in Beijing?

  • Reply
    Unconcerned 2 weeks ago

    Look to what is happening in New Zealand.They welcome foreign interntional money for new builds in the resedential property market but if you are not a resident of New Zealand and do not live there you can not buy existing residential property which has become in short supply.This is a Country dealing with the inflated housing market but at the same time allowing internation investment to purchase off the plan new property which creates a increase in housing stock and imployment.Why is Canada playing with this problem when there are things that can be done.

  • Reply
    Justin Thyme 2 weeks ago

    This could get interesting.

    You have factored in the rise in wages, and weather or not they are high enough to absorb a rate increase, and the evidence seems to be against this.

    But one factor I have not seen in your analysis. There is more than one way for a family to raise their income, beyond a traditional wage hike. One or more income earners in a household can move UP in the income ladder – that is, they can move up to a better paying job, or get more hours and thus a bigger paycheck.

    With Canada’s booming economy, wages for the same job may not be increasing, but there are greater and greater opportunities for people to move up to a better paying job, or to increase their hours,

    Ontario’s hike in the minimum wage just might allow overall family incomes beyond the chief wage earner (secondary or peripheral wage earners) to help them over the crunch.

  • Reply
    C 2 weeks ago

    A little research will show that this problem is only going to get worse. The “elephant in the room” is the additional debt and the HELOC’s that are attached to these homeowners about to renew.
    All levels of government, the BoC and banking institutions have all pumped the brakes on the housing market–does anyone truly believe this is through ignorance or oversight?
    When these mortgages come up for renewal, the bank doesn’t have to approve your renewal, and they certainly don’t have to approve you at lower interest rates. If your credit score/rating has gown down since you purchased your home, or if you have borrowed too much against the “equity” in your home, they will dump you. And they are looking to cut the lowest hanging fruit from their books.
    https://ca.reuters.com/article/businessNews/idCAKBN1DR2MJ-OCABS
    And if these homeowners do get a renewal chances are it will be through a secondary lender–read sub-prime–and now Canada will be sitting on their very own housing meltdown, the same meltdown that so many scream could NEVER happen in Canada.
    And don’t count on speculators to continue to drive up the value of homes, they wont. They will pull their money out and move onto the next “free market” they can manipulate, devour, and spit out.
    PAY OFF YOUR DEBT NOW!

  • Reply
    What's trending in real estate this week: Risks, struggles, and surprises | Toronto Storeys 2 weeks ago

    […] Bank Of Canada: Half Of Canadian Real Estate Mortgages Will Renew By Next Year (Better Dwelling) […]

  • Reply
    What's trending in real estate this week: Risks, struggles, and surprises 2 weeks ago

    […] Bank Of Canada: Half Of Canadian Real Estate Mortgages Will Renew By Next Year (Better Dwelling) […]

  • Reply
    Michael 2 weeks ago

    This just in : https://ca.reuters.com/article/topNews/idCAKBN1DU1YP-OCATP

    Please warn your friends and family if any of these unscrupulous syndicate mortgage brokers try to sell them anything! They are targeting the elderly by saying their high risk “investments” are eligible for RRSP contributions when they are clearly not. FSCO isn’t doing anything about this even though other government agencies from other provinces are sending complaints about this being a Ponzi scheme. Don’t let your savings be scammed away by these crooks!!

  • Reply
    Need-to-Know: The 25 Hottest Real Estate Markets in the US; Vancouver Considers Banning Foreign Buyers - Nobul 2 weeks ago

    […] According the Bank of Canada’s quarterly report of the greatest risks to the national banking system (don’t worry, you don’t actually need to read it, the important info is right here), the housing market—specifically mortgages—ranks close to the top. A staggering 47% of mortgage holders will need to renew, but for most—those who have paid off some debt and increased their household income—it will be relatively easy. The concern is over those whose debt has increased, or who have a mortgage of 450% of their income, who will see an increase in monthly payments that, you guessed it, may be tough to pay. [Better Dwelling] […]

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