More than a million homeowners facing mortgage renewal in 2025 will see “significantly higher interest rates,” with roughly 85 per cent of fixed-rate mortgages coming due that were contracted when the Bank of Canada rate was at or below 1 per cent, warns a new report from Canada Mortgage and Housing Corporation.
A large number of mortgages will come up for renewal in 2025 and 2026, with 1.2 million and 980,000 fixed-rate mortgages, respectively, according to the CMHC report released Monday.
Most of these mortgages will experience higher interest rates than when their term began, with at least 1.05 million fixed-rate mortgages up for renewal in 2025 that were contracted during a time of rock-bottom rates. At present the Bank of Canada’s key rate stands at 3.75 per cent.
One economist says the wave of renewals could result in a flood of home listings as stressed homeowners decide to put their property up for sale.
“In the fourth quarter and early parts of 2025, the renewals will lead to a faster rise in listings in the resale market relative to increase in demand over that period,” said economist Michael Davenport at Oxford Economics.
“As interest rates continue to lower and the loosening of mortgage guidelines filters through, that will lead to a more significant pick up in housing demand in the middle of 2025.”
Already in the private lending space rising mortgage defaults and foreclosures has led to distressed sales in the market. That’s because private lending has significantly higher interest rates and less stringent regulations.
In the second quarter of 2024 the risk profile for alternative lenders expanded, highlighted by a year-over-year increase in defaults and foreclosures within single-family homeowners, the CMHC report said. In the second quarter of 2024 the delinquency rate of 60 days or more for single-family homes was five per cent, up from 1.7 per cent in the fourth quarter of 2022. Foreclosures rose to 3.5 per cent from 1.3 per cent, during the same time period.
Because the real estate market is tight and liquid, meaning that buyers can sell their home relatively quickly and for a substantial price, especially in Toronto, it can provide an alternative option for a household struggling to pay their mortgage wanting to avoid foreclosure, said Tania Bourassa-Ochoa, CMHC’s deputy chief economist.
“In the alternative lending space a larger number are turning to sell their property.”
The overall mortgage delinquency rate continued to climb in the first quarter of 2024 and grew slightly in the second quarter to 0.19 per cent — an increase from a record low of 0.14 per cent in 2022. However, it remains well below the 0.28 per cent rate pre-pandemic in 2019, the report said.
Before people fall behind on their mortgage, other payments take a hit such as car loans, credit cards, and lines of payment — which have all seen a significant increase in late payments.
“Credit card and auto delinquencies can be leading indicators of mortgage delinquency rates, so these patterns suggest that mortgage delinquency will continue to increase into 2025,” the report said.
Higher costs of living and increasing debt-servicing costs have affected households’ budgets over the past year, Bourassa-Ochoa said, impacting the already elevated high household debt creating considerable vulnerability for homeowners.
But there’s relief for mortgage holders.
The Bank of Canada begun its interest rate cutting cycle in June and following four consecutive cuts the current key interest rate is 3.75 per cent falling from a high of 5 per cent. With another cut expected before the end of the year, it will help those facing renewal in 2025 manage their mortgage payments.
If the Bank hadn’t rolled out a rapid rate cut cycle, there could have been a “much sharper” increase in defaults and pushed the economy into a “deep recession,” Davenport said.
“Cutting interest rates quickly guards against that risk,” he said.
