OTTAWA | Households that took on the most debt to buy a home during the pandemic risk seeing their mortgage payments jump by 45%, which threatens the stability of the country’s financial system, fears the Bank of Canada.
“We are sounding the alarm about the high debt levels of many Canadian households and the high house prices,” Central Bank Governor Tiff Macklem said today in releasing his Financial System Review.
The senior economist at Desjardins Group, Benoît Durocher, is not surprised.
“Debt has been talked about for years. It was written in the sky that the problem would hit us sooner or later. »
Toronto and Montreal
The problem has increased sharply during the COVID-19 pandemic, as buying a property has cost about 50% more on average since the start of the health crisis, especially in the suburbs of Toronto and Montreal.
As a result, “a growing number of Canadians have taken out a very large mortgage in relation to their income, and have attached it to a variable rate and an amortization period of more than 25 years,” worries Ms. Macklem.
However, these households who bought a property at a high price and at low mortgage rates in 2020 and 2021 will have to renegotiate their rate 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 will see their median monthly payments jump from $300 (fixed rate) to $700 (floating rate), according to its simulation. . The most indebted households who have chosen a variable rate will suffer the largest increase, to more than $1,000 per month or 45%.
The pressure is rising everywhere
Added to this are the rise in gas and food prices due to inflation and the increase in all other costs since the rates for other loans (car, credit card, etc.) are rising. too.
In April 2021, the Superintendent of Financial Institutions, Federal Banking Regulator Jeremy Rudin, smelled hot soup.
Showing concern that mortgage loans are being given too freely in a context of overheated real estate, he had called on banks and other lenders to show increased vigilance.
Soon after, the stress test rose to 5.25%. Only homeowners who can afford a mortgage rate as high as this figure can get a mortgage.
Thanks to this, “despite the rate increases, most households should be able to make their payments,” said Mr. Durocher.
But, to weather the storm, they may have to curtail consumer spending, which could slow the economy, the economist says.
It doesn’t look easy
SIGNIFICANT INCREASE IN MORTGAGE RATES THIS YEAR
SHARE OF HIGHLY INDEBTED HOUSEHOLDS*
* The share of indebted households with a debt-to-income ratio above 350%
Sources: Lender Spotlight, Bank of Canada and Statistics Canada