Rising Bond Yields Compound Mortgage Challenges for Canadian Homeowners

09 Oct, 2023

Rising Bond Yields Compound Mortgage Challenges for Canadian Homeowners

Approximately 75,000 Canadian homeowners awaiting mortgage renewal notices next month are bracing for an unexpected interest rate surge due to a surprise global bond rally. This development threatens to tighten already stretched household budgets.

In Canada, homeowners can secure five-year mortgages, a contrast to the United States, where customers often opt for 30-year mortgages. Consequently, many Canadians who locked into sub-2% fixed-rate mortgages five years ago are now preparing for renewal letters that may bring a substantial increase in interest rates, exacerbated by the bond rally.

In some cases, renewed home loan rates could climb to as high as 7%, potentially raising the average Canadian mortgage payment by several hundred dollars per month, as estimated by mortgage brokers.

Canadians are already grappling with debt repayment challenges amidst the high cost of living and rising interest rates. This situation has prompted banks to set aside funds to mitigate potential defaults, thereby impacting their overall profits.

With approximately C$200 billion (US$146.36 billion) in home loans due for renewal next year, mortgage brokers and legal professionals are bracing for more distress sales in the property market.

Daniel Vyner, a broker at Toronto-based boutique mortgage firm DV Capital, noted a surge in inquiries from concerned individuals regarding their mortgage maturity date or renewal.

Back in November 2018, the rate for a five-year mortgage stood at about 5.34%, while the three-year rate was at 3.59% in November 2020, according to data compiled by financial data firm Wowa Leads.

Homeowners typically receive renewal notices four to six weeks before their renewal date, as lenders propose various options with updated interest rates based on market conditions at the time.

The recent global surge in bond yields, which has driven the Canadian five-year yield up by as much as 68 basis points since early September, reaching a 16-year high at 4.46% last Tuesday, is expected to be reflected in the November renewals.

Ron Butler, a Toronto-based mortgage broker, emphasized that this significant increase in bond yields would result in higher rates during the renewal process.

Major banks usually contact clients four to six months ahead to outline renewal options. Variable home loans, accounting for roughly half of Canada's outstanding mortgages from July 2021 to June 2022, have already been rising in line with the Bank of Canada's record pace of interest rate hikes.

As of January this year, Canada's mortgage debt amounted to C$2.1 trillion, according to the Canada Mortgage and Housing Corp.