The Bank of Canada has expressed heightened concern regarding household debt burdens compared to the previous year. The bank apprehends the challenges households may face in managing these debts as mortgage renewals occur at higher interest rates in the forthcoming years. This apprehension stands out as a key takeaway from the bank’s annual Financial System Review, which assesses various risks that could potentially impact the stability of Canada’s financial system.
While the report acknowledges risks such as cybersecurity attacks, the ongoing global banking crisis, and climate change, the growing mortgage debt poses a recurring and significant risk, according to the bank’s assessment.
In response to the pandemic, the Bank of Canada initially reduced its benchmark interest rates. However, last year, it implemented a substantial increase in the benchmark rate. Although this move has seemingly achieved its intended objective of curbing inflation, it has adversely affected variable rate mortgages. The bank’s rate has risen from a minimal level above zero in early 2022 to the present rate of 4.5 percent.
Although only a quarter of mortgage holders possess variable rate loans, the rate hikes have had a significant impact. In many cases, mortgage payments have increased by thousands of dollars, leading to an extension of the loan’s duration. Notably, in 2019, less than 20 percent of new mortgages were amortized for longer than 25 years, while last year, almost half of the new loans had extended terms.
While existing mortgages have been shielded from rate increases thus far, they will begin to feel the impact when they come up for renewal in the coming years, causing apprehension for the Bank of Canada. The bank expressed concern about the potential consequences that may arise during this period.
The bank highlighted that the decline in house prices has diminished homeowner equity, and signs of financial strain, particularly among recent homebuyers, are starting to emerge.
By the end of 2026, nearly all mortgage holders will experience higher payments. The bank projects that if interest rates follow their expected trajectory, the average mortgage rate will rise by approximately 20 percent over the next three years.
Royce Mendes, an economist with Desjardins, recently issued a warning about the imminent risk posed by mortgage debt, labeling it a “ticking time bomb” in a report published last week. The alignment of the central bank’s concerns with those of economists like Mendes signifies the shared apprehension regarding mortgage renewals in the coming years.