The management of one crisis often creates another. That was the case during the COVID-19 pandemic when central banks cut interests rates to almost zero in the hopes that they could keep a generational health crisis from becoming a spiralling economic crisis. Between late March of 2020 and February of 2022, the Bank of Canada’s key interest rate was 0.25 per cent. The prime lending rate over that same period, according to ICICI Bank, was 2.45 per cent. Those cuts sparked a housing and mortgage renewal boom. Buyers chased higher priced homes thanks to better monthly affordability, and many existing borrowers refinanced. Now those five-year term mortgages are up for renewal, and while rates have come down somewhat from their mid-2023 highs, those borrowers are looking at prime rates almost double their COVID-era lows. The question, then, is how mortgage holders can keep up.
Christine Tan is a Portfolio Manager with SLGI Asset Management Inc. She explained what we’ve seen so far among Canadians who entered into five-year mortgage terms in late 2020 and have already gone through the process of renewing at a higher rate. She outlined some of the macro forces now at work and explained how tightening consumer balance sheets could, or could not, impact Canadian markets. She stressed that as clients face higher carrying costs for their homes, the response from advisors may be to prioritize debt servicing over long-term savings, at least for now. She noted, too, that panic over rising delinquency rates may be overstated.
“If you look back to 2017 or 2019 before COVID, the delinquency rate for mortgages in Toronto was about 0.1 per cent. CMHC numbers project that by the end of 2026 Toronto could go as high as 0.4 per cent. That sounds high but if you look over the longer-term it’s actually returning to a longer-term normal,” Tan says. “It depends on how you frame things. You can frame it as increasing fivefold since 2022 and it sounds scary, but looking at the longer-term it looks more okay.”
While Tan acknowledges that this rise in delinquency rates is happening across the country and could impact as many as one million households, the broader context would point to this shift as very much something the Canadian economy can weather. Even though many markets are seeing home prices decline from their pandemic-era highs while debt servicing costs rise, this is all within bearable levels.
Drilling down somewhat, Tan sees this trend as another sign of the ‘K-shaped economy’ as well. She notes that lower income and first-time homebuyers are now facing harder to manage debt servicing costs. The impact of US tariffs will also play a role as major manufacturing cities in Southern Ontario, for example, are facing difficult renewals along with job losses.
While delinquency and default rates offer a more extreme view of mortgage cost impacts, Tan also explains how broad sentiment around costs have shifted. She notes that Bank of Canada survey data has found negative consumer sentiment for years now. That was initially sparked by high inflation before debt servicing costs started to be more acutely felt. Those debt servicing costs are now compounding existing consumer challenges around inflation and job instability. As a result, Tan says, consumers are putting off major purchases like homes and vehicles. That is happening despite broad income growth that’s matched or even outpaced inflation in recent years.
While the compounding impacts of inflation and economic insecurity make debt servicing an even more challenging issue for Canadians, Tan notes that there is some hope for those who invested in equities. Markets are at all time highs tight now and that appreciation might help offset a decline in net worth from property prices falling. It could also be a useful moment to take some profits to help pay down existing debt and make the mortgage renewal more bearable on a monthly basis. Advisors, however, have to have the conversation with their clients about how they can strike the balance between making today’s debt more manageable and investing for the future.
Tan acknowledges how difficult, nuanced, and individual the conversation about paying down debt or investing can be right now. She argues, though, that advisors can begin to manage that conversation by starting with a bird’s eye view. By looking at a client’s whole net worth, the capital market assumptions for their portfolio, the cost of their mortgage, and their time horizon an advisor can work out which levers need to be pulled, and by how much, to make the client’s financial picture make sense. At the same time, however, Tan acknowledges the emotional side of these decisions. She notes that issues of economic uncertainty and the relationship people have with their homes will all weigh on how clients manage these questions. Through it all, Tan says that she’s seeing advisors prioritize client wellbeing over everything else.
“The advisors that I’ve spoken to, they just recognize that we need to do what’s best for the client. And if it means in the short term, that their investment assets do draw down, that’s okay. Because the most important thing is to ensure that our clients come out on the other side of this,” Tan says. “At some point, rates will normalize again, and in fact, they are, because the worst of the rate shock will be cresting in early 2027. We’re getting to the worst of it now, and it’ll start to moderate as we get through the rest of this year.”
This article was written by David Kitai and is reposted from the Wealth Professional website.
