Some 60% of Canadian mortgages will be up for renewal over the next three years, according to RBC Capital Markets analyst Darko Mihelic.

Mihelic wrote in a research note on Monday that borrowers are in for “payment shock” when it comes time to renew — and this is true of those who locked in fixed-rate products prior to the Bank of Canada’s barrage of interest rate hikes and variable-rate carriers alike.

“Variable-rate mortgagors are set to see significant payment shock, perhaps as high as 84% by 2026 if interest rates do not decline,” Mihelic warned. “Interest rates would need to decline significantly to ‘save’ this cohort.”

Mihelic added that, unless interest rates decline significantly, “credit losses will inevitably rise, perhaps significantly in 2025 and beyond.” This would present a “tail risk” to Canadian chartered banks, as payment shock is likely to lead to mortgage delinquencies and implicate loan and revenue growth.

“We are not changing our estimates with this report but feel confident that our tepid outlook for revenue growth of approximately 4% in 2024 and 3% in 2025 in Canada retail banking is reasonable as we believe banks will be managing through this phenomenon carefully with slow loan growth, low [net interest margins], and fee pressure.”

In total, the outstanding mortgages set to renew between now and 2026 are worth over $900B.

“We believe there will be more than $186B of mortgages renewing in 2024 at the chartered banks in Canada, and at current interest rates (for example, the five-year fixed mortgage rate of 5.54% is over 180 bps higher than five years ago), a weighted average payment shock of 32% could be expected,” said Mihelic.

As well, the report forecasts that $315B in mortgages will renew in 2025 and $400B in mortgages will renew in 2026. In 2026, payments could spike by as much as 48% on a weighted average basis, the report cautions.