Mortgage wars looming as some Canadians take advantage of lower rates

Canada's major banks are gearing up for increased competition in the mortgage market as many homeowners are set to renew their loans at lower interest rates over the next two years. Royal Bank of Canada (RBC) anticipates that 60% of its mortgage customers will benefit from reduced rates in 2025, leading to a potential 'mortgage war' among lenders striving to attract clients.

This competitive environment is fueled by the Bank of Canada's recent interest rate cuts, which have shifted the focus from concerns about payment increases to opportunities for mortgage renewals at more favorable terms. Approximately 55% of all mortgages with Canadian banks are expected to be up for renewal in the next two fiscal years, prompting institutions like RBC and Toronto-Dominion Bank to expand their sales teams and invest in mortgage operations to capture a larger market share.

Despite the anticipated lower rates, Canada's housing affordability crisis is projected to persist. High home prices, stagnant wages, and increased demand from immigration continue to challenge affordability. Experts suggest that to restore balance, house prices would need to decrease by at least 10%, and mortgage rates would need to fall by half. Current measures, such as longer amortization periods for first-time buyers, may inadvertently increase demand and prices.

In response to the evolving market, many Canadian homeowners are considering switching from fixed-rate to variable-rate mortgages. Following the Bank of Canada's unexpected 50 basis point cut, reducing the benchmark policy interest rate to 3.75%, mortgage brokers have reported increased interest in variable rates due to potential cost savings, despite possible penalties for switching.

To facilitate greater flexibility for borrowers, Canada's banking regulator announced that starting November 21, it will be easier for mortgage borrowers to switch lenders upon renewal. This change removes the requirement for borrowers to prove their income meets the Minimum Qualifying Rate when seeking a 'straight switch,' where only the lender is changed, not the mortgage amount or repayment schedule.

While these developments offer potential benefits for homeowners, financial challenges remain. Despite recent interest rate cuts, Canadian consumers continue to face significant financial stress due to high household debt, rising rents, and the structure of Canadian mortgages, which are mostly variable or adjustable. A substantial number of mortgage renewals are due in 2025, which could lead to increased payments for many homeowners, further impacting household spending and financial stability.