Nearly half of all existing mortgages in Canada will need to be renewed this year, amid rising interest rates and new rules that are making it tougher for some borrowers to shop around.
A new CIBC Capital Markets report suggests an estimated 47% of all existing mortgages will need to be refinanced in 2018, substantially more than the 25% to 35% range in a typical year.
The increase is an unintended consequence of various rounds of regulatory changes in the past few years aimed at reducing risk coupled with rising house prices that made it harder for homebuyers to qualify, according to Ian Pollick, CIBC’s executive director and head of North American Rates Strategy in a report released earlier this month.
“Over the past two to three years, as home prices have risen unchecked, you’ve had people trying to get into the housing market unable to afford longer term mortgages and taken out short-term mortgages,” Pollick told The Canadian Press. “And in 2018, everything is falling on top of one another.”
The increase in renewals comes as mortgage rates have been rising.
Recent Bank of Canada interest rate hikes have pushed up variable rate mortgage rates, while five-year fixed rates up about half a percentage point compared with a year ago as yields on the bond market, where the big banks raise money, have been on the rise since late last year due to an improved economic outlook.
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Borrowers who renew their uninsured mortgages with their existing lenders are not subject to the new B-20 stress test, which took effect January 1.
In turn, there is less incentive for lenders to offer lower rates to compete for market share, as they did during the so-called “mortgage wars” roughly five years ago.
“Some of their customers won’t be able to leave the bank,” Credit Counselling Society president and CEO Scott Hannah said. “Where is the motivation for financial institutions to offer the best rate?”
Dominion Lending Centres spokesman Dave Teixeira said that clients looking to switch do have other options, such as credit unions which are provincially regulated and not required to implement the stress test. However, it is taking longer for its brokers to find another suitable lender.
Craig Alexander, chief economist for the Conference Board of Canada, said the new underwriting guidelines were necessary to limit the growth in household debt and contain the associated risks. He cautioned that Canadians will likely renew their mortgages at rates higher than they have currently, which will have a financial impact, and predicted that the share of income going towards servicing household debt will rise over the coming year.
However, he hastened to add that interest rates still remain “incredibly low,” and that he does not expect the central bank to raise rates until next year.
“They have increased from where they were, but when you look at debt service costs for Canadians, they’re still quite manageable, except for a very small portion of the population,” Alexander said.