Surge in Bond Yields Threatens 75,000 Canadian Homeowners with Mortgage Rate Shock

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Approximately 75,000 Canadians, likely to face the renewal process for their mortgage next month, are steeling themselves for a shocking rise in interest rates, spurred on by an unexpected surge in global bond yields. This unexpected development will undoubtedly place a further strain on household budgets already stretched thin.

Unlike their neighbours to the south, Canadians are only able to secure five-year mortgages, as opposed to the American counterparts who enjoy 30-year financial commitments. Consequently, countless Canadians who took advantage of the under two percent fixed-rate mortgages available five years ago, are now anxiously awaiting renewal letters forecasting a steep hike in interest rates, a situation exacerbated by the bonds selloff.

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In certain cases, freshly renewed mortgage rates could escalate to an alarming seven percent, which mortgage brokers estimate could inflate the average Canadian mortgage by several hundred dollars each month. The struggle to repay debts, already existed for many Canadians, even before the cost of living and interest rates climbed, compelling banks to set money aside in anticipation of defaults, an action which has negatively impacted their profits.

With an anticipated, staggering C$200 billion in home loans due for renewal next year, real estate professionals and legal practitioners are bracing for an increase in distress sales within the housing market. Daniel Vyner, a broker at the Toronto-based firm DV Capital, reported a surge in calls from concerned clients questioning how best to navigate the renewal of their mortgage.

Five-year mortgage rates hovered around 5.34 percent in November 2018, while the three-year rate was positioned at 3.59 percent in November 2020, according to data collated by Wowa Leads, a financial data firm. Homeowners, traditionally, receive a notification about their impending renewal four to six weeks prior to the date, as lenders formulate various options based on then extant market trends. Recent fluctuations in bond yields have driven the Canadian 5-year yield to spike 68 basis points, reaching a 16-year peak on Tuesday at 4.46 percent, meaning the November renewals are certain to feel the impact.

The recent surge in bond yields indicates that, when the system calculates the rates for next week, it will input higher rates consistent with these elevated bond yields, warned Toronto-based mortgage broker, Ron Butler. Variable home loans, which from July 2021 to June 2022 constituted approximately half of Canada’s outstanding mortgages, have been rising in line with the Bank of Canada’s historic surge of interest rate hikes.

Adding to the growing financial pressures, fixed-rate mortgages, influenced by bond yields, are also on the rise. A dramatic leap in mortgage costs would undoubtedly compound the already strained household budgets, fuelling the cost of living crisis which has been a resonating rallying cry for many Canadians. This angst is reflected in plunging popularity polls for Prime Minister Justin Trudeau.

Analysts predict that the pain associated with mortgages could intensify further if the Bank of Canada ups its benchmark interest rate, currently sitting at five percent, in the upcoming months, as anticipated by money markets. Amid this financial tumult, the Office of Superintendent of Financial Institutions is expected to unveil new capital adequacy guidelines for banks and mortgage insurers this month.

Meanwhile, Financial Professionals Canada reveals that one in five borrowers anticipates renewing their mortgage within the next year, a figure expected to leap to over two-thirds within the coming three years. Hanif Bayat, CEO of Wowa Leads, estimates that at least 75,000 individuals receive the dreaded letters every month, revealing increased interest rates as their renewal date draws closer. Bayat suggests that the surge in bond yields over the past month could lead to a C$600 increment in monthly payments on an average.

Amid these financial upheavals, brokers advise homeowners to consider re-amortization, i.e., lengthening the span of their loan repayment. Despite the mounting pressures, brokers like Butler reveal an overarching sentiment among their clients: persistent, palpable worry.