'Payment shock' coming for most Canadians with mortgages, RBC says

financialpost.com:

With 60 per cent of Canadian mortgages set to come up for renewal within the next three years, homeowners are facing a “payment shock” unless interest rates come down in a significant way, according to Royal Bank of Canada.

By 2026, when $400-billion worth of mortgages are set to renew — a figure that includes a large proportion of so-called negatively amortizing loans — the increase in monthly payments could be as high as 48 per cent on a weighted average basis, RBC Capital Markets analyst Darko Mihelic, said in a report Oct. 30.

“We believe a significant number of mortgages are coming due in the next three years” and “that payment shock (the increase in payment at renewal) could be significant and represents a tail risk to Canadian banks,” he wrote. “Unless there are significant declines in interest rates, we believe that credit losses will inevitably rise, perhaps significantly in 2025 and beyond.”

Mihelic predicts lower — but still significant — payment shocks of 32 per cent next year, when more than $186 billion of mortgages are set to renew, and 33 per cent in 2025, when about $315 billion of home loans will come up for renewal.

If the Bank of Canada’s overnight rate, which is now at five per cent, comes down by 100 basis points, that would reduce the payment shock in 2024 and 2025 to about 22 per cent or 23 per cent, according to the report.

But the cohort renewing in 2026 is likely to face the biggest challenges. That’s when a significant portion of variable-rate mortgages with fixed monthly payments are set to renew. Those borrowers have continued to make the same monthly payments as interest rates have gone up, but in many cases are now paying only interest each month, extending the length of time it would take