"We Know It's Going To Be Painful": Half Of Existing Canadian Mortgages Are Up For Renewal In 2018

When commenting last week on the latest troubling trends in Canada's housing market, we predicted that unlike a previous forecast by Deutsche Bank's Torsten Slok from early 2015, who at the time said that "Canada is in serious trouble", this time the moment of truth for Canada's all important housing market was indeed at hand.

The reason?

While it had taken banks some time to push up their mortgage rates, they were finally "catching up" and as Bloomberg reported, just in the past few days Toronto-Dominion Bank - Canada's second largest lender - lifted its posted rate for five-year fixed mortgages by a whopping 45 bps to 5.59% as government bond yields touched their highest levels since 2011 this week.

"It’s a big move, the biggest move in years," said Rob McLister, founder of RateSpy.com, a mortgage comparison website.

As regular readers are well-aware, rising rates in Canada has often been cited as the catalyst that could and would burst the country's housing bubble, because Canadian households, unlike American ones, never managed to delever...

... and even modest increases in rates would have adversely cascading effects.

And while Toronto Dominion was not alone in raising key borrowing rates last week - it was joined by all of Canada's biggest banks - just as the busy season for residential real estate gets underway, a more troubling development is taking place in the mortgage market, which according to Bloomberg is set for a particularly heavy year of renewals in an environment where debt-servicing costs are already soaring at the fastest pace in a decade.

What happens next is anyone's guess, but the answer is critical as it will determine the severity of the recession that is now virtually assured to hit Canada.

“The economy has never been as levered as it currently is, and the economy is far more interest sensitive than it has been in the past, to a degree that we don’t have certainty over how each interest rate hike is going to affect Canadian consumers,” Frances Donald, senior economist at Manulife Asset Management, said by phone from Toronto. “All we know is it’s going to be painful, but how painful isn’t quite clear.”

As Bloomberg notes, the heavy household debt burden is perhaps the key reason the central bank has been reluctant to raise borrowing costs further, after hiking interest rates three times between July and January. Given the nation’s debt load - as of February, households had a record C$2.1 trillion ($1.6 trillion) of mortgage and non-mortgage debt - Poloz estimates the economy is 50% more sensitive to rate hikes than at any time in the past.

And yet, the banks appear to have capitulated last week when one after another they all hiked key mortgage rates in rapid succession, akin to the infamous selling scene in the movie "Margin Call": the bank knew it would launch a financial crisis by being the first to sell as it would force the world to finally admit the emperor was naked.

Now it is Canada's turn.

And here's why Canada will no longer be able to avoid the troubling reality of rising rates: the country is entering a period in which no less than 47% of existing mortgages need to be refinanced this year versus 25% to 35% typically, according to Ian Pollick, head of North American rates strategy at CIBC in Toronto.

Worse, the refis will take place smack in the biggest mortgage interest increase in over a decade, just as the country’s biggest banks are raising key mortgage rates. To be sure, as we reported last week, Toronto-Dominion kicked it off Thursday, hoisting its five-year fixed mortgage rate 45 basis points to 5.59 percent. Royal Bank followed with its own hikes Friday.

Even worse, new mortgage stress tests are pushing some borrowers from the big banks to alternative lenders charging higher rates. Lenders such as the infamous Home Capital Group, which only survived a furious bank run thanks to a last minute bailout by Warren Buffett.

“That’s an unfortunate outcome of the stress test,” Will Dunning, an economic consultant who specializes in the housing market, said by phone from Toronto. “In that sense, the stress test is not reducing risk. It’s increasing risk.”

No matter who they refi with, the pain for Canadian homeowners appears unavoidable. According to Statistics Canada, total payments on debt made by Canadian households rose 6.7% in the fourth quarter from a year earlier, and the interest-paid component climbed 9.2%. Those were the biggest gains since the financial crisis.

A moving average of quarter-over-quarter changes shows a similar pattern, with the 1.62% increase in the latest period the fastest since 2008.

Meanwhile, as shown in the top chart, debt payments now represent about 14% of household disposable income, the highest share in three years: as long as rates keep rising, debt-service ratios will continue moving higher as well over the coming quarters, until a tipping point is reached, and there is a wholesale interest payment revulsion.

“The world spends a lot of time talking about the level of Canadian debt being extremely elevated, but what matters most is not the level of debt that Canadians hold, but the cost of carrying that debt,” Manulife's Frances Donald said. She's right, and the problem is that the cost of carrying that debt is now spiking.

Canadians are going to start to feel the pinch” Donald added ominously.

To be sure, as we reported three weeks ago, the cracks are already appearing: as RBC analyst Vivek Selot pointed out, the roll rate - the percentage of credit card users who “roll” from early stage delinquencies to 60-89 day delinquencies - reached the highest since 2008 for one credit card program, while delinquencies for another were above the 10-year average.

And while the level of mortgage arrears is still low by historical standards, a rising debt service ratio could signal that’s about to change.

The big question, of course, is what happens if and when the economy - which has never been more levered - falls into an all out recession. Perversely, Canada’s economy led the G-7 in growth last year, mostly because of the willingness of the country’s consumers to spend money, much of it on even more (cheap credit). But growth is expected to slow this year; GDP shrank unexpectedly in January, with February due latest Tuesday. Another disappointment, and that may be it for the BOC's tightening cycle.

Meanwhile, leading indicators suggest that the tipping point may have already come:

Canada's retailers have already had a tough few months. Retail sales in February were still 1.8% below 2017 peak levels. In volume terms, the input used to calculate gross domestic product data, first-quarter retail sales probably posted the biggest quarterly drop since the 2008-09 recession.

Canada bulls hang their hat on the country's still low unemployment rate, which has benefited from rising oil prices,  and decent economic growth which should help the economy weather higher rates, although with ever basis point increase, risks are rising.

“You have some capacity in the economy to absorb this, but the fact that rates are going up isn’t positive for consumers, because it’s making credit more expensive,” Bloomberg Intelligence analyst Paul Gulberg said “That’s the but”, and in an economy that has never been more in debt, that is a very big 'but'.


BobPaulson ShorTed Tue, 05/01/2018 - 09:47 Permalink

Prognostications of calamities in the 2007-2008 crash were only correct in areas where there was liar loans, or NINJA mortgages or estimator fraud. The big crumple was from securitization of these bad loans that were essentially founded on fake estimators. None of that is happening here, so there won't be a whipsaw crash (people love to predict crashes for some reason). I think there will be a grinding down of prices in Vancouver and Toronto though, but I doubt you will see more than a 20% drop. That said, flippers get killed off bad on even a 10% drop, so they will get owned. Massive wave of foreclosures? Not gonna happen. Too much inertia in the system. Call me if rates go above 8%.

In reply to by ShorTed

Broken_Trades CJgipper Tue, 05/01/2018 - 10:18 Permalink

1.) This article make zero mention of adjustable rate mortgages.

2.) No one in Canada is on 5 year fixed term mortgages anymore.

3.) Almost everyone I know who owns a house has a variable mortgage at Prime -1% or more.

3.) Right now on TD Canada Trusts website you can get a 6 year FIXED at 3.04%, or a 5 year variable at 2.87%.


Free Money has never been so FREE




In reply to by CJgipper

pitz Broken_Trades Tue, 05/01/2018 - 13:32 Permalink

1.  40% of Canada's mortgages adjust "overnight".  The rest for terms between 1 and 5 years, with the average being around 2 years.  


2)  Roughly 60% of the market goes to the fixed rate option, 5 year terms being the most popular.  Although nearly all of those fixed term loans contain very generous provisions allowing the bank to change the rate if they want.


3)  Prime - 1% is increasingly rare.


4)  Those super-low rates are increasingly unavailable to individual borrowers as equity is falling due to house price stagnation at 2013 levels that has been seen over the past 5 years.  


5)  Prices are stable if not falling in Canada, so typical rates closer to 4-5% are actually very expensive relative to what is probably an economy teetering on the brink of deflation.  Deflation is almost a certainty over the next 5 years as well.  

In reply to by Broken_Trades

TheRedScourge pitz Tue, 05/01/2018 - 17:29 Permalink

Most Canadians get 5 year fixed mortgages. This means most Canadians will be refinancing at LOWER rates than they had before.


They won't get the 2.29% rate that I'm paying by locking in at the bottom in late 2016, but 3% is still possible from RateHub and TNM in Canada. But if you go with the big banks, they try to lock you in at 4-5%.

In reply to by pitz

funthea BobPaulson Tue, 05/01/2018 - 10:21 Permalink

While I'll defer most of what you said to "you may be right". I have to inject a bit of concern, however, in the fact that almost half of all mortgages were ARM loans. The Cucks must live in a different reality than I do. I watched that insanity play out in the U.S.. Sad they didn't learn anything from that. There will be pain.

In reply to by BobPaulson

PrometeyBezkrilov funthea Tue, 05/01/2018 - 11:09 Permalink

Not only that, if you point to all the countries where the parasites pulled the same trick with brainless population, they would say it is different in Canada. In other words, other country's experience and history doesn't teach anything. Citizenry in Canada wants to step on their own rakes, coloured in red and white. So be it.

In reply to by funthea

bluskyes BobPaulson Tue, 05/01/2018 - 11:03 Permalink

"Prognostications of calamities in the 2007-2008 crash were only correct in areas where there was liar loans, or NINJA mortgages or estimator fraud. The big crumple was from securitization of these bad loans that were essentially founded on fake estimators. None of that is happening here,"

Yes it is. If you ever put a dollar down, on a property, then your mortgage broker isn't very good. CMHC will insure anything in a rising market.

In reply to by BobPaulson

ATM BobPaulson Tue, 05/01/2018 - 12:37 Permalink

Debt service ratios are far too high. Add in a little recession to your calculations and a 20% drop easily becomes a 40% drop and then no one will re-up on a mortgage where they are underwater by hundreds of thousands of loonies. Otherwise they would simply be loony.

A 40% drop in home prices.......... maxed out credit cards...... maxed out budgets paying for said homes.... government funding problems.....


Where have I heard all of this before? 

In reply to by BobPaulson

keep the basta… economicmorphine Tue, 05/01/2018 - 09:43 Permalink

debt service payments at 14% of disposable,  thats next to nothing. When30 or 40 % or more  like in australia and that  this interest level and for 30 years and just for a roof over head, not for  excesses

Aust  private debt is truly scarey and aus is fked. full of immigrants everywhere, little aus kids having to sit on the floor because of so many asians flooding in. Well brought up girls refusing to go  to the best private schools in Melbourne because they are chockers with chinese. Best universities full of paying asians so who wants to go there now. See the asians being 'tutored' for assignments. 

In reply to by economicmorphine

GunnerySgtHartman Tue, 05/01/2018 - 08:52 Permalink

Anyone want to place a bet on how long it takes Justin Trudeau to propose an Obama-style "Home Affordable Refinance Program" or "Home Affordable Modification Program" of his own?

pitz CJgipper Tue, 05/01/2018 - 13:34 Permalink

5 years is the maximum that interest rates can be fixed for in Canada.  So the 5-year CD market is aligned with the 5-year term mortgages.  Banks hence are perfectly and naturally duration matched which mostly eliminates interest rate risk in the Canadian banking system.  Interest rate risk is hence vested with the borrowers.

In reply to by CJgipper

taketheredpill Tue, 05/01/2018 - 08:53 Permalink


If you look at the year over year % change in Canada 3-Year mortgage rates:

Peaked in 1999 at 23%

Peaked in 2006 at 23%


Imagine you've levered yourself to the nuts to get a toehold in the insane Toronto housing market.  But you've got a small cushion so things should be ok...

And then your monthly payments go up by 20%.

FUUUUCCCKKKKKKK!  That's what lots of folks all over Canada are saying right now.

Toronto Kid Aliens-R-Us Tue, 05/01/2018 - 10:38 Permalink

They've already started complaining that the mortgage payment is more than they can afford now that it is renewed after 1 year, and the house isn't worth what they paid for it.

Then there are the lot who are complaining that the house isn't worth what they bought it for and they can't sell the previous place. (Also known as the truly frakked)

Houses around me are on sale for prices that are twice their actual value. Rents are extremely high, with landlords making stupid demands. It's all insanity, with the only way out either moving to Calgary (low rents) or living with a relative and paying them rent. And the only thing that will stop this is an utter collapse of the economy.

In reply to by Aliens-R-Us

PrometeyBezkrilov Toronto Kid Tue, 05/01/2018 - 13:11 Permalink

Witnessed the same sh&t in WA state back in 2008. Every stupid fyck was buying left and right-2, 3, 5 houses and renting out. As prices were going up, they took loans against the houses and bought themselves expensive cars. Bunch of dorks thought that are leaving the “American dream”. And then gangsters pulled the flush lever. We all know what happened after that.  Scenario remains the same.

In reply to by Toronto Kid