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RBC Capital Markets Conference 2023

Despite easing rates, bank CEOs say clients face $400-$500 monthly mortgage payment hikes at renewal

An anticipated decline in interest rates over the course of 2024 should help soften the impact of mortgage renewal payment shocks, according to RBC President and CEO Dave McKay.

But he and fellow Big Bank CEOs estimate that clients are still likely to face monthly payment hikes of between $400 and $500 this year.

Speaking at the annual RBC Capital Markets 2024 Canadian Bank CEO Conference held in Toronto, McKay also said falling interest rates should also result in a shallower recession and faster economic recovery.

“I think that the lower rates are going to help on the credit side. They’re going to alleviate some of the payment shock we’re seeing in our economy, going to free up more cash flow for consumers to spend in the economy and help drive a quicker recovery and…a shallower recession, softer landing,” he said.

TD Bank President and CEO Bharat Masrani echoed those thoughts. “One of the things that we’re certainly encountering now is a far, far lower level of concern with these mortgage renewals that are coming up since the forward curve is implying that the rates are going to go down,” he said.

Analysts estimate about $251 billion in mortgages are due to come up for renewal this year, with another $352 billion worth in 2025.

At RBC—the country’s largest mortgage lender—about 14% of its overall $300-billion mortgage portfolio will be up for renewal in 2024, with another 25% in 2025 and more than 30% of the portfolio in 2026.

“It’s still back-ended to 2025 and 2026, and we fully expect that rates will come down significantly by 2025 and 2026,” McKay noted.

Economists from the big banks expect the Bank of Canada to reduce the overnight target rate by anywhere from one to 1.75 percentage points from its current level of 5.00%. That would lower mortgage rates for variable-rate mortgage holders.

Meanwhile, fixed mortgage rates have also been trending lower since October, which has eased the qualification hurdle for new borrowers and softened the payment shock for existing borrowers facing renewals.

Mortgage-holders to see an average monthly increase of $400

But even with an easing of rates, nearly all mortgage holders are still facing substantial monthly payment increases at renewal given that most obtained their current mortgage at rock-bottom rates during the course of the pandemic.

McKay estimates borrowers will experience a roughly $400-a-month increase in mortgage payments in 2024, or an increase of about 20% to 25%.

“That’s not dissimilar to what a number of mortgage holders were going through in 2023,” he added. “And our experience in 2023 as an industry and at RBC is that consumers are doing a very good job of using their savings [and] changing their spending habits if necessary.”

Scotiabank President and CEO Scott Thomson said his clients are seeing monthly increases of between $400 and $500 a month, but so far hasn’t seen “any significant credit issues.”

McKay also noted that average incomes have risen about 20% since 2019, which is also expected to help borrowers absorb the increase in mortgage payments.

“So income is up, they’ve built up a bit of a cash surplus, [and] they have the ability to change their spending patterns if necessary,” McKay said. “They’re handling that $400 increase very well for all three of those reasons.”

More highlights from the conference

The following are some of the other key comments delivered during the conference by several of the CEOs representing Canada’s largest banks:

On delinquencies:

  • RBC’s McKay: “Through 2024 we expect [losses] to be a little bit worse than 2023 in a number of fronts…we forecasted from 25 basis points in 2023 upwards to 30 basis points to 35 basis points through the peak in 2024.”
  • TD’s Masrani: “We’ve said what we’ve seen in most of the asset classes that we’re still in the normalization phase, we haven’t yet normalized…where I think we are now what we call normalized levels would be auto loans actually. Credit cards, we are still below what we would call normalization rates. We are not seeing, from an actual numbers perspective, any delinquencies or any indication that we have a major issue brewing here.”

On housing:

  • McKay: “There’s a huge need for housing, as everybody knows, in our economy and but rates are at a point where it’s uneconomic for many consumers to make that commitment to a pre-sale. So lower rates will trigger more confidence in pre-sale activity will allow more projects to go forward and start to build that capacity…we have a lot of work going on to clear the red tape to create zoning, to create infrastructure, to create housing, we need some rate support that consumers feel confident in making that pre-sale commitment and then we’ll see that go forward.”

Miscellaneous

  • Thomson on Scotiabank’s focus on deepening its client relationship: “In the last quarter, [about] 65% of mortgages originated with multi-product, three-products or more…and frankly through our mortgage channel…almost 80% are multi-product.”
  • McKay on the recent approval of its HSBC Canada acquisition: “We’re very happy to see this phase and get the approval on HSBC, because it’s good for Canada, it’s good for HSBC employees, it’s good for clients and we get to move this transaction forward at speed now…[As for] the concessions that you saw come out around the approval of the deal, the vast majority of that we had already contemplated.”
  • Masrani on TD improving its mortgage processing: “We’ve been working hard to improve our mortgage processing…We increased our sales force [specifically mobile mortgage specialists] across the country. We put in sizable amounts of investments at improving the experience at the branch level.”