"Renewal risk remains" as the majority of the 1.2 million mortgages up for renewal in 2025 will face higher interest rates than when their term began, finds the Canadian Mortgage and Housing Corporation (CMHC) in their Fall 2024 Residential Mortgage Industry Report.
The report, released Monday, is a bi-annual economic analysis of the residential mortgage industry in Canada, which provides insights into the evolving mortgage landscape and its trends.
According to CMHC, 85% of those 1.2 million mortgages were contracted when the Bank of Canada (BoC) rate was at or below 1%. Currently, the rate sits at 3.75, though experts are predicting another 50 basis point cut on December 11. Still, the interest rate isn't expected to hit 2% until July 2025, at the earliest, and will likely not be hitting 1% anytime soon.
Thus, a certain percentage of those with mortgages up for renewal in 2025 could experience interest rates anywhere from 1% to 2.25% higher than when they entered into their term.
With interest rates remaining high, CMHC also reports that, in 2024, mortgage delinquencies continued to increase from "historic low levels" of 0.14% in 2022. In the second quarter, the mortgage delinquency rate hit 0.19% — a rate below pre-pandemic levels (0.28% in 2019) and well below averages since 1990, but one expected to increase through 2025, as suggested by delinquency rates on other credit products and allowances for expected credit losses.
As mortgage delinquencies increased, so did overall mortgage debt. Total mortgage debts reached $2.2 trillion in July 2024, "exacerbating the vulnerability of elevated household debt," according to CMHC. This represents a 3.5% year-over-year increase, which remains below recent averages, though lower interest rates could accelerate the increase, the report warns.
"Slower mortgage debt growth occurred as many potential buyers have remained on the sidelines for much of the year, driven by high borrowing costs and elevated home prices," explains the report. "Other contributing factors include the expectation of lower mortgage rates in the short-term and relatively modest home price fluctuations in 2024 in many regions of the country."
Another impact of high interest rates and the expected cutting of those rates, was a decrease in mortgage terms. "With borrowers expecting interest rates to fall in the coming years, there is less incentive to lock in for the full five-year term," says the report.
Instead, borrowers opted for fixed-term mortgage rates for durations ranging from three years to less than five years. Of the $43.7 billion of all newly extended mortgages by chartered banks in July 2024, over half ($24.3 billion) fell within this reduced duration range, finds the report. In comparison, five-year fixed-rate mortgages only accounted for 12% of newly extended mortgages in July 2024.
Also in anticipation of additional rate cuts from the BoC (which increased the premiums on variable rates), the share of newly extended mortgages with a variable interest rate fell to 9% in July, down from 20% earlier in the year, finds CMHC.
