Canadian consumers are currently facing increasing financial pressure due to higher interest rates, and this is affecting the country’s largest lenders. However, there are steps that borrowers and banks themselves can take to mitigate the impact. The latest bank earnings have shown that a slowing economy is causing profit dips and higher provisions for possible loan losses. Despite this, some banks claim to be “comfortable” with the risk levels on their mortgage books. Royal Bank of Canada CEO Dave McKay stated that the higher interest rates and other external factors would cool Canada’s economy. According to TD Bank, consumer spending remains resilient, particularly in the services industry such as travel and entertainment.
However, the higher interest rates have yet to fully impact Canadian consumers. Only a third of outstanding mortgages have been renewed at higher interest rates, meaning many Canadians are yet to feel the full impact. This is particularly concerning for consumers with variable-rate mortgages on fixed payment schedules. When these mortgages are up for renewal, consumers may be forced to make higher regular or lump-sum payments or lock into a fixed-rate product, leading to higher overall costs.
TD Bank has the highest proportion of mortgages with amortizations exceeding 25 years, meaning many consumers could face higher payments upon renewal. The Bank of Canada has increased its benchmark interest rate by 4.75 percentage points over the past 20 months, and as a result, consumers will have to pay higher costs of borrowing.
The Financial Consumer Agency of Canada has released new guidelines to help ease the burden of mortgage renewals on vulnerable customers. Major banks such as RBC and CIBC have already implemented practices to support clients during the renewal process, such as proactive communications and offering relief measures.
As homeowners approach mortgage renewals, it is essential for them to reach out to their current lender and get a quote for the rate offered at renewal. It is also recommended to consult with a mortgage professional to assess whether a better rate can be obtained elsewhere. However, some homeowners may face difficulties changing lenders due to the higher rate environment, in which case sticking with the existing lender might be the only option. In this situation, homeowners should consider committing to a renewed mortgage for a shorter term, such as two or three years.
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