First National Financial LP

Residential Market Commentary - Bank of Canada looks at mortgage risks

  • First National Financial LP

The latest Financial System Review by the Bank of Canada highlights growing concerns about household debt in this country, particularly mortgage debt.

The Bank says it expects more households to face increasing financial pressure over the next few years as their mortgages come due for renewal.  It also says the recent declines in house prices have reduced homeowner equity and signs of financial stress are starting to show up, especially among recent homebuyers. 

The Bank says about one-third of all mortgages have increased in cost since February of 2022.  Bank modeling suggests that just about all mortgages will have been renewed by 2026 and it expects a median payment increase of 20% between now and then.

The review indicates most households are coping with increased mortgage costs brought on by higher interest rates.  Many have turned to longer amortization periods to ease the pressure.  Mortgages with amortizations of longer than 25 years increased from 41% to 46% in 2022 and are up from 34% in 2019.  Perhaps of greater concern is the growing use of credit cards, especially by recent homebuyers. 

“A larger proportion of them are carrying an outstanding balance and a higher average amount is being carried over. Both metrics now exceed their pre-pandemic peaks. Households that took on a mortgage between 2020 and 2022 are carrying over about 17% more credit card debt, on average, than those that purchased between 2017 and 2019,” the review says.

However, the Bank points out the worst effects will not be felt unless the is “a large negative shock, such as a severe global recession with significant unemployment that further depresses house prices, [which] could increase loan defaults among households.”  That scenario is not in the forecasts.