Bank of Canada Alarm sounds: Horizontal storm

Ottawa | The Bank of Canada fears that families who took out more debt to buy a home at the time of the pandemic risk will have their mortgage payments increased by 45%, threatening the stability of the country’s economy.

“We are hearing the alarm about the high credit levels and high housing prices of many Canadian households,” Central Bank Governor Tiff McClellan said while releasing his economy review today.

Benoit Durocher, a senior economist at the Desjardins Group, was not surprised.

“We’ve been talking about debt for years. It is written in the sky that the problem will hit us even further. ⁇

Toronto and Montreal

The problem was exacerbated during the COVID-19 pandemic because it has averaged 50% more to buy property since the onset of the health crisis, especially in the suburbs of Toronto and Montreal.

As a result, “an increasing number of Canadians have taken out a very large mortgage on their income and added it to the variable rate and debt forgiveness period of more than 25 years,” Ms. Maclem is concerned.

However, these families who bought property at higher prices and lower mortgage rates in 2020 and 2021 will have to reconsider their rate when it is highest in 2025-2026.

With a floating rate of 4.4% and a fixed rate of 4.5%, households will be able to increase their median monthly payments from $ 300 (fixed rate) to $ 700 (floating rate), the bank said. Most indebted families who choose a variable rate face an increase of more than $ 1,000 or 45% per month.

Stress is increasing everywhere

All other expenses are added as gas and food prices rise due to inflation and other lending rates (car, credit card, etc.) increase.

In April 2021, Jeremy Rudin, superintendent of financial institutions and federal banking regulator, saw the smell of hot soup.

Concerned that mortgage loans are being given too free in the wake of the real estate warming, he called on banks and other lenders to be more vigilant.

Immediately, the pressure test increased to 5.25%. Only homeowners who can afford a mortgage rate higher than this number can get a mortgage.

Thanks to this, “despite the increase in rates, most households should be able to make their payments,” Mr Durocher said.

But, to deal with the storm, they need to reduce consumer spending, which will slow the economy, the economist said.

It does not seem easy

Significant increase in mortgage rates this year

Share of indebted families *

* The share of indebted families with an income ratio of more than 350%

Sources: Lender Spotlight, Bank of Canada and Statistics Canada