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 period payments in many cases and extending the life of the loan.
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 they expect, the typical mortgage rate will be about 20 per cent higher over the next three years.
Royce Mendes, an economist with Desjardins, recently warned about the looming risk of mortgage debt, calling it a “ticking time bomb” in a report last week. It’s clear the central bank is thinking the same thing, he said Thursday.
“The Bank of Canada is worried about the same thing we are: mortgage renewals a few years in the future.”
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