Canadian homeowners bracing for interest rate hike as mortgage renewals loom

In Toronto, around 75,000 Canadian homeowners anticipating mortgage renewal notices next month are preparing for an unexpected increase in interest rates. This surge is attributed to a surprising rise in global bond yields, adding financial strain to already constrained household budgets. Unlike the U.S., where 30-year mortgages are common, Canadian homeowners, particularly those who secured sub 2% fixed-rate mortgages five years ago, are now facing renewal letters with a significant uptick in interest rates, exacerbated by the recent bonds selloff.
Mortgage brokers estimate that, in certain instances, renewed home loan rates may climb to 7%, leading to a minimum increase of several hundred dollars per month on the average Canadian mortgage. With the existing challenges of high living costs and escalating interest rates, Canadians are grappling with debt repayment difficulties. Consequently, banks are setting aside funds as a precaution against defaults, placing a burden on their overall profits.
As approximately C$200 billion ($146.36 billion) worth of home loans are set for renewal next year, mortgage brokers and legal professionals are gearing up for an increase in distressed property sales. In November 2018, the rate for a five-year mortgage stood at approximately 5.34%, while the three-year rate was at 3.59% in November 2020, according to data from financial data firm Wowa Leads.
Homeowners typically receive renewal notices four to six weeks before their renewal date, providing various options with new interest rates based on current market trends. The recent global shift in bond yields, elevating the Canadian 5-year yield by up to 68 basis points since early September to a 16-year high of 4.46% on Tuesday, is expected to be reflected in the November renewals.
As the Bank of Canada rapidly increases interest rates, variable home loans, constituting about half of Canada's outstanding mortgages from July 2021 to June 2022, have been on the rise. The country's mortgage debt is currently at C$2.1 trillion, according to Canada Mortgage and Housing Corp.
With fixed-rate mortgages, influenced by bond yields, now on the rise, homeowners find themselves with no refuge. This notable increase in mortgages would not only constrict household budgets but also worsen the ongoing cost of living crisis, a focal concern for many Canadians. The decline in Prime Minister Justin Trudeau's popularity in opinion polls has been attributed to this situation.
Analysts warn that the mortgage challenges might intensify if the Bank of Canada proceeds with another benchmark interest rate hike in the coming months, as anticipated by money markets, potentially pushing it beyond the current 5%, and likely maintaining higher levels for an extended period.
The Office of the Superintendent of Financial Institutions, the banking regulator, is anticipated to unveil updated capital adequacy guidelines for banks and mortgage insurers this month. Similarly, in the UK, where homeowners are facing mortgage renewals in the upcoming months, bond yields are on the rise.

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Canadian homeowners bracing for interest rate hike as mortgage renewals loom

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