Bank of Canada cautions about significant surge in mortgage payments
According to the Bank of Canada, homeowners preparing to renew their mortgages in the upcoming years will encounter significant spikes in payments, particularly those with variable rate mortgages, facing a median monthly payment surge of over 60 percent.
Despite the recent escalation in interest rates, the majority of homeowners have managed to navigate the changes well, maintaining residential mortgage defaults below 0.5 percent nationwide, as highlighted in the central bank’s annual Financial Stability Report released on Thursday.
However, the report underscores that the capacity of households and businesses to manage their debts has emerged as a primary concern for the stability of Canada’s financial system.
Governor Tiff Macklem emphasized during a press conference on the report that a rise in unemployment could swiftly elevate financial vulnerabilities, potentially leading to increased mortgage payment defaults, especially given the significant resets anticipated.
Since the aggressive interest rate hikes initiated by the central bank in March 2022, approximately half of the country’s outstanding mortgages have renewed at elevated rates. Despite initial concerns, this transition has been relatively smooth, attributed to factors such as income growth, accumulated savings, and reduced spending among homeowners.
Moreover, the report revealed that renters are experiencing heightened financial strain compared to homeowners, with an increasing number missing payments on car loans and credit cards.
The impending wave of mortgage resets presents a potentially more challenging phase. Many homeowners set to renew their mortgages within the next two years made their purchases early in the pandemic, benefiting from the Bank’s policy interest rate at an emergency low of 0.25 percent. However, it has since climbed to 5 percent.
While most Bay Street economists anticipate the central bank to initiate rate cuts this summer, Mr. Macklem has cautioned that the reduction in interest rates will likely be gradual, not reverting to the levels observed during the pandemic or the preceding decade.
Homeowners with variable rate mortgages featuring fixed monthly payments, maintaining consistent payments throughout the mortgage term, will face the brunt of the payment hike. Bank estimates suggest the sharpest surge will occur in 2026, with the median monthly payment soaring by over 60 percent. In 2025, the median increase surpasses 50 percent, while this year sees around a 30 percent hike.
For individuals holding fixed-rate mortgages, where the interest rate remains constant throughout the loan duration, the impact at renewal will be less severe. Fixed-rate mortgages are tied to longer-term bond yields, which have decreased since autumn. According to bank projections, the most significant escalation is anticipated in 2026, with the median increase exceeding 20 percent.
While issuing a cautionary note regarding escalating mortgage payments, the report overall struck a more positive tone compared to last year’s publication. During that period, financial markets were in a fragile state following significant events such as the collapse of Silicon Valley Bank in the U.S., the emergency intervention at Swiss bank Credit Suisse, and the near-collapse of British pension funds.
Highlighting current market trends, the report points out the growing pressure on the office real estate sector, particularly evident in major cities where office vacancies are on the rise. This trend extends to Toronto, Canada’s financial hub, where the vacancy rate is approaching 20 percent.
The report also sheds light on the exposure of small to medium-sized banks to the commercial real estate sector, with loans in this area constituting 20 percent of their portfolio. In contrast, large banks have a lower exposure, with commercial real estate loans comprising 10 percent of their portfolio.
