In recent developments, the Canadian residential mortgage industry has experienced significant shifts, highlighted in the CMHC’s Fall 2023 Residential Mortgage Industry Report. This article, written in simple terms, will explore these changes and their implications, especially considering the impact of rising interest rates on homeowners. It will also touch on the situation of rentals in Ottawa, as this is a relevant aspect of the broader Canadian housing market.
Changing Landscape in the Canadian Mortgage Market
The first half of 2023 saw a notable slump in home sales, directly impacting new mortgage activities. This decrease in sales led to a deceleration in the issuing of new mortgages. However, despite this slowdown, the overall outstanding mortgage debt continued to grow, especially in the uninsured mortgage segment.
Shift in Consumer Behavior
Canadians are increasingly opting for longer mortgage terms and extended amortization periods. This change indicates a move away from shorter mortgage terms, suggesting that consumers are not expecting immediate decreases in interest rates. In fact, 3-to-5-year terms have now become the most popular choice among Canadians. Moreover, there has been a significant trend towards extending amortization periods beyond 25 years for most new mortgages, indicating a shift towards longer repayment periods.
Increasing Financial Pressure
A steep rise in interest rates, the largest in over four decades, has coincided with historically high levels of household debt and a higher cost of living. This situation has led to growing financial pressure on mortgage holders, potentially affecting the overall economy. The increase in rates, particularly since March 2022, has already caused one out of three borrowers to see their monthly mortgage payments increase, especially those with variable rate mortgages.
Impending Interest Rate Shocks
In the years 2024 and 2025, approximately 2.2 million mortgages in Canada, representing 45% of all outstanding mortgages, will face an interest rate shock. Most of these mortgages were contracted at record-low interest rates around 2020 – 2021. The total amount of these mortgage loans due for renewal is over $675 billion, nearly 40% of Canada’s GDP in 2022. This massive sum underscores the significant impact that these renewals could have on the Canadian economy.
The Impact on Monthly Payments
As homeowners renew their mortgages in the coming years, they are expected to face a substantial increase in their monthly payments, potentially between 30% to 40%. Despite this, Canadian borrowers are likely to continue prioritizing their mortgage payments over other debt payments and consumption choices. The increase in interest rates alone is estimated to add an additional $15 billion per year to what homeowners must disburse to maintain their mortgage payments.
Rentals in Ottawa
The broader implications of these changes in the mortgage market also extend to the rental market. As homeownership becomes increasingly challenging, more individuals might turn towards rentals as an alternative. This trend could particularly impact cities like Ottawa, where the demand for rentals could see a rise, leading to changes in rental prices and availability. The situation of rentals in Ottawa thus becomes an important aspect to monitor in the context of these broader market shifts.
The Canadian residential mortgage landscape is undergoing significant changes, marked by a slowdown in new mortgage activity, a shift towards longer mortgage terms, and growing financial pressure due to rising interest rates. This evolving scenario poses challenges not only for homeowners but also impacts the rental market, including rentals in Ottawa. As the economy braces for the impending interest rate shocks, understanding these trends is crucial for both homeowners and renters alike.