Perfect storm on the horizon: 45% higher mortgage payments heading

Households that took on the most debt to buy a home during the pandemic risk seeing their mortgage payments rise by 45%, threatening the stability of the country’s financial system, the Bank of Canada fears.

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“We are sounding the alarm about the high levels of debt among many Canadian households and high home prices,” Central Bank Governor Tiff Macklem said today in the release of his Financial System Review.

Desjardins Group senior economist Benoît Durocher is not surprised.

“Debt has been talked about for years. It was written in heaven that sooner or later the problem would hit us.

The problem has grown sharply during the COVID-19 pandemic as it has cost an average of about 50% more to buy a property since the health crisis began, particularly in the Toronto and Montreal suburbs.

As a result, “more Canadians have taken out mortgages that are very large in relation to their income and combined it with an adjustable rate and a payback period of more than 25 years,” Ms Macklem worries.

However, those households that bought a property at a high price and low mortgage rates in 2020 and 2021 will need to renegotiate their rates in 2025-2026 when they will be at their highest.

The bank says that with a floating rate of 4.4% and a fixed rate of 4.5%, households’ average monthly payments will increase from $300 (fixed rate) to $700 (floating rate), according to their simulation. The most indebted households that have opted for a variable rate will suffer the largest increase, to more than $1,000 per month, or 45%.

Added to this is the increase in gas and food prices due to inflation and the increase in all other costs, as interest rates on other loans (car, credit card, etc.) also rise.

In April 2021, Superintendent of Financial Institutions, Federal Banking Regulator Jeremy Rudin smelled hot soup.

He expressed concern that mortgage lending is being overstretched amid overheated real estate, and urged banks and other lenders to show heightened vigilance.

Shortly thereafter, the stress test rose to 5.25%. Only homeowners who can afford such a high mortgage rate get a mortgage.

Thanks to that, “most households should be able to make their payments despite the rate hikes,” Mr Durocher said.

But to weather the storm, they may need to rein in consumer spending, which could slow the economy, the economist says.



* Percentage of indebted households with a debt ratio of more than 350%

Sources: Lender Spotlight, Bank of Canada and Statistics Canada

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