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Variable-rate mortgage borrowers best hope the Bank of Canada gets inflation back to target by its mid-2025 estimate. That is, if a report from Desjardins on Thursday is any indication.

A slower pace of rate cuts – let alone higher rates – would “translate into more pain for households at renewal,” wrote Royce Mendes, the firm’s managing director and head of macro strategy.

This week’s lowest fixed and variable mortgage rates in Canada

Because the market recently increased it expectations of how high the bank’s key lending rate will rise, “the huge increase in payments expected in 2025 and 2026 for these mortgages is now even larger,” he said.

Just how high payments will rise depends heavily on what rates borrowers get at renewal in a few years.

Desjardins’s models currently forecast an increase in variable-rate payments of more than 30 per cent for people renewing in 2025-26. And that’s based on its expectation that the central bank’s key lending rate will fall 2.75 percentage points from its current rate of 5 per cent by some time in 2025. That’s a materially more aggressive rate cut forecast than what the market has priced in.

But why are variable-rate payments set to increase so much if interest rates are projected to drop?

The reason is that one-third of projected payment hikes are a result of variable borrowers paying off less principal, given that rates have soared and their mortgage payments are fixed.

The good news

The rate shock will be smaller for fixed-rate borrowers, which make up two-thirds of mortgagors. Someone renewing a five-year fixed two years from now might theoretically see a 4.37-per-cent renewal rate. That’s a ballpark estimate based on five-year forward rates in the bond market, as tracked by Refinitiv.

A 4.37-per-cent, five-year fixed renewal rate would be just 223 basis points higher than their starting rate in 2020. (A basis point is 1/100th of a percentage point.) And these borrowers would have already been stress-tested for rates as high as 4.94 per cent when they got their mortgages.

People with floating-rate mortgages that have adjustable payments will also feel little shock. They’ve already felt it given their payments have risen with each Bank of Canada increase.

All told, almost a third of people with mortgages have already seen their payments go up, according to the Bank of Canada’s Financial System Review from May.

Rising incomes are critical

One’s ability to keep up with mortgage payments also depends on their paycheque, and Desjardins hasn’t factored income gains into its analysis.

If recent wage trends continue, a typical employee renewing in 2025 might see their income grow by roughly 18 per cent versus when they took out their mortgage in 2020. That’s assuming wages keep growing at the three-year trend of roughly 3.3 per cent a year. Higher pay could absorb the majority of payment shock.

Of course, if a recession hits, the number of Canadians enjoying wage increases may fall. That’s nothing to celebrate, but it shouldn’t be drastic. Unemployment, which may need to increase to bring inflation back to target, is seen rising only 0.8 percentage points, according to Refinitiv’s poll of economists.

On top of all this, countless borrowers will refinance to lower payments, borrow more against their equity, tap into accumulated savings or ask their bank for hardship payment relief, all of which should soften the renewal blow in 2025.

Little stability threat

At last week’s Bank of Canada news conference, I asked if the risk to financial system stability is material.

Senior Deputy Governor Carolyn Rogers responded, “There’s no overhyping the pain that some Canadians are feeling.” And she’s absolutely right.

But the very real payment pain some mortgagors feel – and financial system stability – are two different things.

“This is less about a financial stability concern,” Desjardins’s Mr. Mendes said in a phone interview Thursday. Moreover, “the Bank of Canada can alleviate much of the pain in 2025 and 2026 by cutting rates more than what’s currently being priced by markets.”

He adds “… There will be pressure on the Bank of Canada to push rates to low levels in 2025 to prevent a subset of mortgage holders from running into serious financial difficulties.”

Ultimately, most borrowers will have options either way. “If the payment increase that you see creates stress in your household budget, you do have a number of ways to mitigate that stress,” the bank’s Ms. Rogers noted when asked recently about borrower flexibility at renewal.

The best way of all to mitigate that stress will be to get inflation back to its 2-per-cent target … pronto. If the Bank of Canada can do that before its mid-2025 forecast, this discussion may prove largely academic.

Rates are provided by as of July 20, 2023. Only providers advertising rates online and lending in at least nine provinces are included. Insured rates apply to those buying with less than a 20 per cent down payment or switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.

Robert McLister is an interest rate analyst, mortgage strategist and editor of You can follow him on Twitter at @RobMcLister.

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