Renewal-Shock Concerns Are Fading for Canadian Mortgage Holders

(Bloomberg) -- Canadian homeowners set to renew their mortgages this year can rest a little easier about having to pay higher rates.

Rates to renew a five-year mortgage aren’t much higher than they were when the mortgages were taken out, according to National Bank research. That means “no payment shock” for the 17.4% of mortgages renewing in 2019, Matthieu Arseneau, deputy chief economist at the Montreal-based bank, said by phone.

Financial conditions have eased since January to the point where the renewal rate for five-year mortgages is barely above the current 3% “effective,” or average, rate for all mortgages coming due this year, he said. Back in January, Arseneau estimated there would be a 70- to 90-basis-point payment shock for mortgage renewals.

A drop in government bond yields and lower funding costs for financial institutions have led to a decline in rates to about 3.1% for insured mortgages and 3.2% for uninsured, Arseneau said. The lower rates along with a stellar jobs market means “we can expect a rebound in consumption,” after a weak reading in the fourth quarter, he said.

National Bank’s estimates jive with those from Bank of Canada Governor Stephen Poloz, who said in a speech this month mortgage payments didn’t rise for most borrowers who recently renewed a five-year, fixed rate mortgage, in spite of interest rate increases from the central bank and tougher eligibility criteria for home loans.

It remains to be seen whether consumers will face a payment shock in 2020 and 2021. Arseneau estimates 24.1% and 26.8% of mortgages in those years will face renewal, with effective rates of 2.8% and 2.6%, respectively.

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Chris Fournier in Ottawa at cfournier3@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary

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