By Tom Parkin
December 5th, 2024
BURLINGTON, ON
Mortgages contracted at the ultra-low rates of 2020-22 will cost $15B a year more in payments; over-mortgaged Toronto to be the epicentre.
Individual households and the broader economy will be hurt by two million mortgages facing renewal at higher interest rates starting next year, says a November report from Canada Mortgage and Housing Corporation.
The pain is an echo from the interest rate hikes that started in spring 2022 after governments left it to the Bank of Canada to fix an inflation surge.
Tania Bourassa-Ochoa
In 2025, 1.2 million fixed-rate mortgages come up for renewal and another 980,000 face renewal in 2026, according to the CMHC’s Fall 2024 Residential Mortgage Industry Report.
CMHC deputy chief economist Tania Bourassa-Ochoa found 85 per cent of these 2.2 million mortgages were previously contracted when the Bank of Canada’s policy rate was at or below 1% and were previously financed between 1% and 2% interest. The policy rate was under 1% from March 16, 2020, to April 14, 2022.
CMHC foresees $15B economic impact, but TD report draws sunnier picture
Bourassa-Ochoa believes current mortgage rates already significantly factor in expected future rate cuts by the Bank and therefore mortgage rates on five-year terms will not fall much further in 2025.
The CMHC report estimates the two million mortgage holders will collectively pay about $15 billion more a year and cites an example of a $500,000 mortgage jumping in cost by $950 each month. Affected Canadians will give priority to debt payments and essential purchases and cut back on other consumer goods, CMHC believes.
Clarification: Yesterday’s Data Shows post on electricity reported Ontario had started “no major projects” since 2018. As the post reports, Ontario has started refurbishment projects. It has started no major project to increase generation capacity.
But while the CMHC report focuses on the impact on those who borrowed during the ultra-low rates era and face renewal, a recent TD Bank report focuses on those holding mortgages contracted during the period of 5.25% peak rates and can soon renew at lower rates.
The rate peak of 5.25% ran from July 13, 2023 to June 5, 2024.
The November 20 TD Bank report contends those who contracted mortgages at the interest peak and will now renew at lower rates will offset the impact of those facing a renewal cliff enough to avoid a recession or systemic risk.
TD reports many Canadians shifted to shorter-term mortgages to be able to take earlier advantage of falling rates and the total aggregate amount Canadians spend on mortgages will now decrease by 1.2 per cent in 2025, not increase 0.5 per cent, as they previously projected.
The TD and CMHC reports highlight how different groups will experience mortgage renewal differently in 2025. No doubt these will lead to different political responses.
Toronto likely epicentre of broader economic impact
The impact epicentre of those facing a renewal cliff will be the Greater Toronto Area due to high debt levels. Lured by nearly free money between 2020 and 2022, driven by a fear of missing out, and amid a provincial failure to spur construction, many GTA households took on massive mortgages to purchase overpriced housing.
The ensuing housing crisis rapidly inflated Toronto prices throughout 2020 and 2021. And in early 2022, Toronto seized Vancouver’s long-held title of Canada’s most expensive city, according to Canadian Real Estate Association data.
But the pain won’t just be for owner-occupiers. Higher mortgage costs may cause some owner-investors to try to pass on higher financing costs to residential tenants. Others may sell investment properties, pushing condo prices, already well down from the 2022 peak, even lower. Developers may further delay project completions until prices turn up, deepening the housing shortage.
And all those hurt by the renewal cliff will carry the pain into their local economy through lower consumption, and likely already has.
Recent Statistics Canada data shows retail sales in the rest of Canada hit a new high in September while Ontario retail sales remain below a peak in February 2022. That was the month before interest rates started moving up and the Toronto housing crash started. Higher mortgage renewals certainly won’t help retail sales.
However events play out at the aggregate level, Ontario’s housing failure is deeply implicated in the province’s ongoing economic troubles, especially in the GTA. And these troubles will continue despite $60 million in publicly paid partisan advertising telling Ontarians it’s just a vibe-cession.
Leave a Reply