The Bank of Canada is more worried than it was last year about household debt loads, and is concerned about the abilities for households to stay on top of them in the coming years once mortgages renew at higher rates.
That’s one of the main takeaways of the bank’s Financial System Review, an annual assessment of various risks the bank deems to be of concern to the stability of Canada’s financial system.
While the bank highlighted the risks of cybersecurity attacks, the ongoing global banking crisis and climate change, the risk presented by growing mortgage debt was a recurring theme throughout the document.
After slashing them in the early days of the pandemic, the Bank of Canada raised its benchmark interest rate aggressively last year.
While the move appears to have achieved its desired effect of bringing down inflation, it came with the collateral damage of walloping variable rate mortgages, as the bank’s rate moved from barely above zero in early 2022 to 4.5 per cent presently.
While only about one-quarter of mortgage holders have a variable rate loan, the effect of rate hikes has been dramatic, adding thousands of dollars to the periodic payments in many cases and extending the life of the loan by years if not decades.
In 2019, less than one-fifth of new mortgages were amortized for longer than 25 years. Last year, almost half of new loans were stretched out over a longer period.
Existing mortgages, many of which have been insulated from rate hikes so far, will start to feel their impact in the coming years as they renew, and the bank is worried about what might happen when they do.
“The decline in house prices has also reduced homeowner equity, and some signs of financial stress — particularly among recent homebuyers — are beginning to appear,” the bank said.
By the end of 2026, nearly all mortgage holders will have seen their payments increase. The bank says if rates evolve the way financial markets expect, the typical mortgage payment will be about 20 per cent higher over the next three years.
Financial stresses appearing
The numbers show that the financial stresses on households that the bank is worried about are already starting to appear.
The average debt service ratio — the percentage of a household’s total income that goes toward paying their mortgage — rose from 16 per cent to more than 19 per cent last year. That’s the highest level on record in at least a decade.
And the percentage of all mortgages where the DSR is in excess of 25 per cent skyrocketed, from 12 per cent in 2021 to 29 per cent by the end of last year…
Author: Pete Evans
Source: CBC Canada
