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Weekly Commentary

How Worries about Mortgage Renewals Could Steal Christmas

December 1, 2023
Royce Mendes,
Managing Director and Head of Macro Strategy

The holiday season is in full swing again, but it’s beginning to look like Canadian consumers might be more hesitant to spend this year. Households have continued to park money in their bank accounts in 2023, despite the economy being fully reopened. Over the past year, Canadians have placed $175 billion in term deposits at chartered banks, an increase of roughly 40%. Data released this week showed that households saved 5.1% of their disposable income in the third quarter, much more than the average of just 2.4% between 2015 and 2019.


Canadians are spending less to save more. Excluding car sales, which are catching up after lengthy supply disruptions, retail sales are only 1.2% higher than they were a year ago, a significantly slower pace than the pre-COVID average annual growth rate of 3.5%. Yesterday’s GDP data showed similarly feeble total consumer spending growth in the third quarter. Real consumption per capita has fallen 1% over the past year.


The recent weakness in consumption data is particularly surprising given that the population 15 years and older has increased 2.9% in the past 12 months. In contrast, the US economy, which has experienced slower population gains, has seen much stronger consumer spending growth.


Retailers in Canada are adjusting. Hiring in the industry has been non-existent in recent months, while job vacancies in the sector have plummeted back to pre-COVID levels.


It’s true that, as of the second quarter, Canadians were only spending the same percentage of their incomes servicing their debt as they were in 2019. But it’s not hard to believe that Canadians with looming mortgage renewals are getting their financial houses in order before the coming storm.


Rate resets look likely to be a significant drain on household finances in the coming years. Should markets be right about the path for interest rates, the worst-off borrowers could see upwards of 70% increases in their monthly mortgage payments.


There are, of course, ways to soften the blow. Many will look to extend the amortizations of their mortgages, while others will be tempted to make lump-sum payments. These options, however, come with their own costs.


Making significant adjustments to the amortization schedule of a mortgage can materially alter the long-term financial trajectory of a household. Extending the length of time a borrower takes to pay off debt could add hundreds of thousands of dollars in additional interest payments and would leave the borrower at the mercy of the ups and downs in interest rates for even longer.


Lump-sum payments therefore represent a prudent way to de-risk a household’s balance sheet. But the numbers are huge. A homeowner who made a 20% downpayment and borrowed the rest to purchase an average-priced house in Toronto during the pandemic would need to come up with between $80K and $200K to keep their monthly mortgage payment the same when it comes up for renewal.


The daunting prospect of higher monthly mortgage payments, longer amortizations, large lump-sum payments or some combination of them is clearly weighing on the minds of many Canadians. It’s still early, but there are already rumblings that households might scale back their plans for the holidays. Instead of the Grinch, it could be mortgage renewals that steal Christmas this year.