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Automotive financial experts claim Canada is heading towards a hard hit on car sales due to mortgage renewal interest rates, in a few years.
Robert Karwel, Senior Manager for Automotive Practice in Canada at JD Power, and Scotiabank Economic Analyst John Fanjoy told Canadian auto dealers that most Canadians have yet to reach the renewal of their five-year closed mortgage. When they do, it could impact their vehicle purchases.
That will be something that will take a lot of steam out of the marketplace and that’s going to be a challenge, says Karwel. You have to live and eat before you buy a car. The average vehicle financing payment is about $850 now. That is with a whole bunch of individuals having a sub-two percent mortgage on their home.
When these customers renew, Karwel said it will be between four and six percent higher. This, he added, is what keeps him and others in the industry who analyze these situations up at night more than the risk of a recession: the mortgage renewal cycle.
Karwel said if the interest rates come down, there have been suggestions the Bank of Canada may begin that process in June which relieves some of the stress from the mortgage renewal cycle but won’t have an overall significant impact on vehicle sales.
It might be more of a relief for customers, but does that change someone’s mind about whether they are going to buy a car or not? I don’t think so, said Karwel. But it’s going to relieve some stress amongst the OEMs and dealers in terms of increased vehicle sales. It will help out in terms of that, but I don’t think it’s a big impetus to spur more sales.
Similarly, Scotiabank’s economic analyst said that a small percentage drop will not make an appreciable difference.
On aggregate, it will take some time and some more cuts than just one or two from the Bank of Canada for that to maybe appear to be a more meaningful change that customers could see when looking to finance a vehicle purchase, says Fanjoy.
He also said that about a third of Canadians have a mortgage. Within that, there is a smaller subset who will see their mortgages refinancing at higher interest rates than what they may have locked into three to five years ago.
As time goes on and market price changes within the Bank of Canada policy rate it may not be the case that households will be refinancing their mortgages at the high interest rates we’re seeing today, but rather potentially lower interest rates, says Fanjoy. Those balance some of the concerns about mortgage financing shocks.
Some families may feel the higher mortgage resetting payments, even as the Bank of Canada is expected to cut. And they may be faced with the need to prioritize certain purchases. As Fanjoy noted, it may mean putting off a new vehicle purchase or buying a lower-price new vehicle or a used vehicle to accommodate for the higher interest payments.
