Big Six bank expects borrowing costs to weigh on economy, housing, and mortgage markets
Although the Bank of Canada may be nearing the end of its cycle of interest rate increases, a new TD Economics analysis indicates that Canadian consumers with debt are only now beginning to experience the effects of increasing borrowing costs.
As a result of increased interest payments, TD anticipates that the national debt service ratio will reach a record high in the first quarter of next year.
"While interest rates have been rising since the start of this year, the impact on households' bottom lines has only just begun. Debt service costs rise with a lag as mortgages and loan payments are renewed at current market rates," said the report, which was released on Monday.
Since March, the Bank of Canada has rapidly increased its benchmark lending rate – which serves as the foundation for many loans, including some auto and mortgage loans – by 400 basis points to 4.25%.
For the January meeting of the central bank, TD anticipates another quarter-point increase.
The debt service ratio, or the proportion of disposable income required to make debt payments, was 13.3% at the start of 2022, according to data from TD and Statistics Canada. This is anticipated to increase to almost 16% next year, breaking the previous pre-pandemic record.
Higher interest rates are already affecting the housing market as prices and sales activity decline.
The mortgage market will continue to suffer from rising borrowing costs as many homeowners try to renew or refinance soon at a higher rate.
According to TD, since the pandemic began, when rates were at historic lows, the proportion of variable-rate mortgage originations increased by 6% to 56% during the first quarter of this year.
The Bank of Canada had warned Canadians to anticipate interest rates to remain at historically low levels for several years throughout the height of the pandemic.
"Faced with higher borrowing costs, some households that are not at their maximum amortization of 30 years may choose to extend the length of their loans," the report said.
"For variable rate mortgage holders with fixed rate payments, amortization will increase automatically, though only up to a point. Once borrowers hit rates at which they are no longer covering any principal, they may have to raise their payments."
