Mortgage holders are opting for shorter terms amid high rates

Mortgage holders are opting for shorter terms amid high rates - setting the stage for a potentially dangerous wave of renewals

While five-year mortgage terms are typical, customers at Canada's largest banks have been electing to sign for shorter durations, RBS report says.

More Canadian homeowners have opted for shorter-term mortgages in recent months, according to a new report, setting the stage for a large and potentially dangerous wave of renewals in a couple years’ time.

While five-year mortgage terms are typical, customers at Canada’s largest banks have recently been electing to sign up for shorter durations, likely in the hope that sky-high interest rates will be lower in the coming years, giving them a chance to refinance at a lower rate sooner.

It’s a trend worth watching, according to a report from RBC published last week, because if interest rates remain stubbornly high when these mortgages come up for renewal all at once — existing five-year mortgages along with the new, shorter-term loans — it could mean another big hit for household finances.

Homeowners have been struggling with rising rates for months and Statistics Canada said Tuesday that higher mortgage interest, which rose by more than 30 per cent in July year-over-year, was the biggest single contributor to the country’s annual rate of inflation ticking up more than expected last month.

“Many Canadian banks have recently seen a trend of customers choosing to renew their mortgages for two- or three-year terms as opposed to the most common five-year term given high interest rates,” according to the RBC report by analyst Darko Mihelic (the report was reissued Monday with a correction to certain estimates related to bank dividends).

Mihelic said mortgages set to mature within two to five years increased from the end of 2019 to the beginning of 2022, which is roughly when the Bank of Canada began its interest-rate hiking cycle in a bid to combat inflation.

Since then, mortgages in the two- to five-year maturity range have decreased while those set to mature within one to three months and one to two years have increased as a proportion of total residential mortgages.

“All in, we are seeing a shift in the duration of the mortgage portfolio and more and more mortgages will be maturing in 2025 and 2026 as a result,” the report said, adding it will be “worthwhile following this development, particularly if interest rates do not start to decline next year.”

“Hopefully interest rates will have (meaningfully) decreased before this event occurs as many borrowers will face meaningful mortgage payment increases should the current rate environment persist.”

Mihelic’s comments on the mortgage trends were part of a preview of the big banks’ third-quarter financials, which they are set to report beginning Aug. 24.

The RBC analyst said he expects earnings per share at TD, BMO, CIBC, Scotiabank and National Bank to decrease on average by about six per cent year-over-year (Mihelic doesn’t cover his employer).

He noted that a major factor in the expected decline is a drop in mergers and acquisition activity, leading to lower bank revenues.

Canada’s big banks are expected to face pressure to rein in costs later this year, Mihelic said, and they are also grappling with ongoing demands by regulators to set aside more capital as a buffer against challenging macroeconomic conditions.

By Christine Dobby Business Reporter - Wednesday, August 16, 2023
Toronto Star