Thousands of Canadian homeowners, already grappling with the challenges of an economic rebound, are bracing for another hit: soaring bond yields that threaten to push mortgage renewal rates to levels not seen in years.
The Bond Yield Surge and its Impact
The global rise in bond yields, spurred by the anticipation of swelling inflation as the world economy bounces back from the pandemic, is expected to directly impact Canadian homeowners. The heightened bond yields lead to increased borrowing costs for banks, resulting in higher mortgage rates.
Daniel Vyner, a broker at the Toronto-based boutique mortgage firm DV Capital, notes the heightened concerns among homeowners. “We’re having a lot of phone calls about people with concern… (about) what they should be doing to brace themselves for the maturity date, or the renewal of their mortgage,” said Vyner.
About 75,000 Canadian homeowners who are set to receive their mortgage renewal notices next month might face shocking rate jumps. A significant number of these homeowners had locked into sub 2% fixed-rate mortgages five years ago, and with the bond yields taking an unexpected turn, some could see their interest rates surge dramatically. Estimates from mortgage brokers suggest that in some instances, renewal rates could even reach a staggering 7%.
The outcome? This could push up the average Canadian mortgage by several hundred dollars a month.
Comparing the Mortgage Landscape
In contrast to the U.S., where homeowners can lock into a 30-year mortgage, Canadians typically opt for five-year mortgages. As a result, many are ill-prepared for such swift and significant rate hikes, especially those who enjoyed rates below 2% half a decade ago. The recent selloff of bonds only exacerbates the looming issue.
The data underscores the severity of the situation. Financial data firm Wowa Leads reported that the rate for a five-year mortgage was approximately 5.34% in November 2018. Come November 2020, a three-year rate was priced at 3.59%.
“This dramatic rise in bond yields means that when the computer chugs along and sets up the rates for next week, they will be using higher rates based on these high bond yields,” explains Toronto-based mortgage broker Ron Butler.
Financial Strain on Homeowners
Canadians, already facing the challenges of high living costs and burgeoning interest rates, now confront another hurdle. Many are struggling to service their debts, prompting banks to allocate reserves for potential defaults, which in turn depresses their profits.
But the repercussions don’t end there. Mortgage brokers and lawyers are gearing up for a potential surge in distress sales in the property market, given the nearly C$200 billion in home loans due for renewal next year.
Exploring Alternatives: The Risky Business of Variable-Rate Mortgages
For some, the solution might be a switch to variable-rate mortgages, which presently offer lower rates. But this solution is not without its pitfalls. While these mortgages might provide temporary relief, they also come with the inherent risk of rate hikes in the future.
A Nationwide Concern
The current mortgage situation has broader societal implications. The sharp spike in mortgages could further constrict household budgets, deepening the cost of living crisis. This has stirred considerable discontent among Canadians, with evident repercussions on Prime Minister Justin Trudeau’s standing in recent opinion polls.
Hanif Bayat, CEO of Wowa Leads, suggests that the spike in bond yields over the past month could potentially add an average of C$600 to monthly payments. For homeowners seeking solutions, one available option might be re-amortization, effectively extending the loan repayment duration.
The bottom line? “I hear worry, consistent, definitive worry,” sums up Butler.
(Exchange rate mentioned: $1 = 1.3665 Canadian dollars)