Typical mortgage payment could be 30% higher in 5 years, Bank of Canada warns
High home prices and associated debt are a major vulnerability for the Canadian economy, the Bank of Canada said Thursday, warning buyers who bought during the pandemic that the impact of even slightly higher mortgage rates high could be dramatic.
In its review of the financial system, the central bank said that while the country’s financial system is sound and has weathered the pandemic well, the economy remains vulnerable due to high debt levels linked to the growing real estate market. expensive in the country.
“Even though the average household is in better financial health, more Canadians have been scrambling to buy a home during the pandemic,” Bank of Canada Governor Tiff Macklem said Thursday. “And these households are more exposed to higher interest rates and the potential for lower house prices.”
The bank said assessing the risks of high levels of household debt has become more complex, but overall “vulnerability has increased”.
About two-thirds of Canadians are homeowners, and about half of them own their homes, while the rest have some kind of mortgage debt attached to them.
Rising lending rates have slowed the housing market
Home prices have risen about 50%, on average, during the pandemic as low rates allowed buyers to qualify for larger loans while keeping ongoing payments relatively affordable.
After cutting its benchmark interest rate at the start of the pandemic, in March 2022, the bank began raising its benchmark lending rate from 0.25% at the start of the year to 1.5% today. today, and the impact on the housing market was almost immediate, with a slowdown in sales volumes, as well as average sales prices.
“Given the unsustainable strength of real estate activity, moderation in housing would be healthy,” Macklem said. “But high household debt and high house prices are vulnerabilities.”
As part of its analysis of the resilience of the financial system in the face of various shocks, the bank considered what the impact of a rise in rates and a fall in selling prices could look like.
As part of this, the bank calculated what might happen to recent homeowners’ mortgages when their loans were up for renewal in five years.
The bank assumes that in 2025 and 2026, variable rate loans will cost 4.4% over five years, while fixed rate loans will be slightly higher at 4.5%. Both scenarios are about two percentage points higher than what is available on the market today.
Mortgage costs could rise by 30%
Under this scenario, the 1.4 million Canadians who obtained a mortgage in 2020 or 2021 would see their median monthly cost increase by $420, or 30% at renewal.
The impact on fixed rate borrowers would be slightly less, as they would see their payments increase from $1,260 on average to $1,560 per month, an increase of 24%.
But variable-rate borrowers are even more vulnerable, according to the bank’s think tank, as their typical monthly payments jump from $1,650 a month right now to $2,370 at renewal. That’s a 44 percent increase.
“If members of highly indebted households lose their jobs, they will likely have to cut spending significantly to continue paying their mortgages,” Macklem said.
“It’s not what we expect… But it’s a vulnerability to watch closely and manage with care,” Macklem said.