Higher interest rates challenge renters and mortgage holders facing steep payment increases
The Bank of Canada has raised concerns about the impact of rising interest rates on renters.
According to The Financial Post, while most households are managing the higher costs of debt servicing, many mortgage holders are expected to face substantial payment increases upon their mortgage renewals in the next two-and-a-half years.
Governor Tiff Macklem highlighted the ongoing adjustment to higher interest rates as a continued risk to financial stability during the release of the bank's annual report on financial system stresses.
Senior Deputy Governor Carolyn Rogers pointed out that renters are experiencing stress, with the share of households without a mortgage that are behind on credit card and auto loan payments returning to, or surpassing, typical levels after reaching historical lows during the pandemic.
Furthermore, over the past year, the percentage of borrowers without a mortgage who carry a credit card balance of at least 80 percent of their credit limit has increased.
The report also flagged several issues including stretched valuations of some financial assets, a sharp increase in leverage use by the non-bank financial sector, and exposure risks to commercial real estate which has seen a rise in the national office vacancy rate to around 20 percent.
Since March 2022, when the Bank of Canada began increasing interest rates, payments have risen for about half of all outstanding mortgages. A significant portion of these mortgages will renew in the next two-and-a-half years, leading to larger payment increases for these borrowers.
“Higher debt-servicing costs reduce a household’s financial flexibility, making them more vulnerable if their income declines or they face an unexpected material expense,” the report noted.
It was highlighted that the median increase in monthly mortgage payments would exceed 20 percent at renewal in 2025 and more than 30 percent in 2026, compared to their origination.
The financial pressure will be most acute for households that took out mortgages around the peak of house prices in 2021 and early 2022, when rates were very low. These households, having taken on large mortgages relative to their incomes, have seen minimal increases or even decreases in home equity.
By the end of 2023, more than a third of new mortgages had a debt-service ratio greater than 25 percent, a doubling from 2019.
The report also mentioned that while large banks with healthy capital cushions are managing mortgage market stresses, some smaller lenders have seen a notable increase in credit arrears.
“Increased provisions for loan losses are impacting profitability but also enhancing banks' resilience,” the report stated. It also noted that funding remains stable for banks, though costs have risen.
The report concluded that while most borrowers should manage with conservative wage increases, and some are adjusting by increasing savings and making lump-sum contributions, a significant financial shock, such as a rise in unemployment, could heavily impact the financial system and the banks.
