About 75,000 Canadian homeowners who are waiting for notices of mortgage renewals next month are preparing for a shocking interest rate increase brought on by an unexpected global bond rally, which will further strain already tight household budgets.

In contrast to the United States, where customers can obtain 30-year mortgages, homeowners in Canada can obtain five-year mortgages. This implies that many Canadians who locked into fixed-rate mortgages with interest rates under 2% five years ago must be ready for renewal letters with high interest rate increases made worse by the bond market boom.

According to mortgage brokers, some renewal house loan rates might exceed 7%, which would increase the typical Canadian mortgage by at least a few hundred dollars per month.

In Canada, increasing living expenses and rising interest rates have already made it difficult for many to pay off their loans. Due to this, banks have been required to set money aside in case of default, which has hurt their total earnings.

Mortgage brokers and solicitors are bracing for more distress sales in the real estate market as around C$200 billion ($146.36 billion) in home loans are due for renewal in 2019.

“We’re having a lot of phone calls about people with concern… (about) what they should be doing to brace themselves for the maturity date, or the renewal of their mortgage,” said Daniel Vyner, a broker at Toronto-based boutique mortgage firm DV Capital.

According to information gathered by financial data company Wowa Leads, the rate for a five-year mortgage was approximately 5.34% in November 2018 and the three-year mortgage was priced at 3.59% in November 2020.

As lenders devise new choices with new interest rates based on market trends at the time of renewal, homeowners receive notice four to six weeks before to their renewal date. The Canadian 5-year yield has increased by as much as 68 basis points since early September, reaching a 16-year high on Tuesday at 4.46%. This increase in yield will certainly be reflected in the November renewals.

“This dramatic rise in bond yields means that when the computer chugs along and sets up the rates for next week, they will be using higher rates based on these high bond yields,” Toronto-based mortgage broker Ron Butler said.

Big banks typically get in touch with customers four to six months in advance to discuss renewal alternatives.

Between July 2021 and June 2022, variable mortgages, which made up about half of all outstanding mortgages in Canada, were already increasing at a record-breaking rate. According to Canada Mortgage and Housing Corp., as of January this year, the nation owed 2.1 trillion Canadian dollars on its mortgages.

Homeowners now have nowhere to run since fixed-rate mortgages, which are driven by bond yields, are rising as well.

An abrupt increase in mortgages would make household budgets even more constrained and exacerbate the cost of living crisis, which has become a focal point for many Canadians. As a result, Justin Trudeau, the prime minister, has seen a sharp decline in popularity.

And if the Bank of Canada increases its benchmark interest rate one more time in the upcoming months, as money markets anticipate, from the current 5%, and is likely to stay higher for longer, analysts say, the pain associated with mortgages could get worse.

On X, a social media platform, a homeowner claimed that his former rate of 2.6% is suddenly increasing to 6%. “I don’t know how people can afford to live in these G7 countries.”

According to Mortgage Professionals Canada, one in five borrowers anticipate renewing their mortgage in the upcoming year, increasing to more than two-thirds during the following three years.

At least 75,000 consumers receive these emails each month with revised, higher interest rates as their renewal comes closer, according to Hanif Bayat, CEO of Wowa Leads.

He says that the recent increase in bond yields may have increased monthly payments by an average of C$600.

Re-amortization, or lengthening the number of years it would take homeowners to repay their loan, is one action they may take, according to brokers.

“I hear worry, consistent, definitive worry,” Butler said.

(Adapted from Reuters.com)

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