Interest Rates Have Rocketed, But 5-Year Mortgage Holders Are Largely Sheltered From It
The Bank of Canada embarked on an aggressive tightening cycle in 2022 to combat decades-high levels of inflation. This cycle involved a rapid succession of interest rate hikes, marking the most rapid tightening cycle in Canada’s history. The Bank’s response to inflation included a series of rate increases, culminating in the policy interest rate reaching 5% by early 2023, a level not seen since 2001.
Canadian 5-year mortgage holders are indeed somewhat sheltered from the immediate impact of interest rate increases, but only for the duration of their fixed-rate term. During this period, the interest rate remains constant, providing a sense of stability and predictability in monthly mortgage payments. This can be seen as a form of protection against the volatility of interest rates in the short term.
However, this shelter is temporary. Once the fixed-term expires, usually after 5 years, mortgage holders will need to renew their mortgage at the prevailing market rate. If interest rates have risen during this period, homeowners may face significantly higher monthly payments upon renewal.
In March 2024, the Typical 5-Year Mortgage Holder in Canada was Still Only Paying 2.97% Interest: New Data
Given that so many Canadians piled on to 5-year mortgages during the ultra-low interest COVID-era, and because they are locked into these rates until 2025-2026, the weight of their mortgages brings down the average to a surprisingly low 2.97%.
The Average Outstanding 5 Year Mortgage Rate in Canada is About to Explode Upwards
The sheer volume of new mortgages during the ultra-low interest COVID period has skewed the numbers so that 2022 and 2023 had little impact on the overall average.
Take a look at the chart below.
It depicts the projected rate at which each mortgage term will reach market rates.
You’ll find that only 10% of 5-year mortgages (yellow line) renewed in 2023.
You’ll also find that in 2024 the number of renewals is projected to double to 20%.
During 2025? That number is projected to rise again to 30% of all 5 year mortgage renewals occurring during that year.
This suggests that over the next 2 years 50% of all 5-year mortgages in Canada will renew at the market rate (currently 5%).
The moral of the story: One year from now, the chart of the 5-yr average interest rate will look very different than it does today. Expect it to commence lift off over the next 6 months.
