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Typical mortgage payment could be 30% higher in 5 years, Bank of Canada warns

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Bank of Canada said Thursday that rising home prices and the associated debt burden are major vulnerabilities to the Canadian economy, dramatic for buyers who bought during the pandemic, even if mortgage rates were slightly higher. Warned that it could affect.

In a review of the financial system, the central bank said the country’s financial system was strong and successfully survived a pandemic, but the economy remains vulnerable due to rising debt levels associated with the country’s increasingly expensive housing market. rice field.

“The average household finances are good, but more Canadians are buying homes during a pandemic,” said Bank of Canada Governor Tiff McClem. “And these households are exposed to higher interest rates and the potential for lower home prices.”

Banks said the assessment of risks associated with high household debt levels has become more complex, but overall “vulnerabilities have increased.”

About two-thirds of Canadians are homeowners, about half own a home completely, and the rest have some mortgage debt.

Rising lending rates slowed the housing market

During the pandemic, house prices rose by an average of about 50%. This is because low interest rates have allowed buyers to qualify for larger loans while keeping continuous payments relatively affordable.

Many of those soaring home prices are built on a debt base. Almost one-fifth of Canadian households are considered “high debt,” which means that the debt-to-income ratio is at least 350 percent, banks say.

Before the pandemic, only one in six had so much debt. Barely 20 years ago, in 1999, only one out of 14 households had so much debt.

“These numbers mean that every rate hike will have a bigger impact on the economy than in the past,” said Royce Mendes, an economist at Dejardan.

And those rate hikes have already begun.Banks in March 2022 after lowering benchmark interest rates at the start of the pandemic Benchmark lending rates have begun to rise From 0.25% at the beginning of the year to 1.5% today, the impact on the housing market is almost immediate, with sales volume slowing along with average selling prices.

“Given the unsustainable strength of housing activity, housing moderation will be healthy,” McClem said. “But high household debt and rising house prices are vulnerable.”

As part of an analysis of the resilience of the financial system in the face of various shocks, banks investigated the implications of rising interest rates and falling selling prices.

Mortgage costs can rise by 30%

As part of that, banks have calculated figures on what happens to mortgages if a recent homeowner’s loan is renewed within five years.

Banks assume that in 2025 and 2026, floating rate loans will cost 4.4% over five years, while fixed rate loans will be slightly higher at 4.5%.

Both scenarios are about 2 percentage points higher than those currently available on the market.

In that scenario, 1.4 million Canadians who took out a mortgage in 2020 or 2021 would have a median monthly cost increase of $ 420, or 30 percent, at renewal.

The impact on fixed rate borrowers is slightly less. Their payments average from $ 1,260 to $ 1,560 per month, an increase of 24%.

But floating rate borrowers are even more vulnerable under a bank’s thought experiment. Their typical monthly payments range from the current $ 1.650 per month to $ 2,370 at renewal. This is a 44 percent increase.

“If people in heavily debted households lose their jobs, they will need to cut spending significantly to continue mortgage services,” McClem said.

“This is not what we expect … but careful monitoring and careful management is a vulnerability,” Macklem said.

Other risks other than housing

Vulnerability to the housing market was only part of the financial system review. It is a broad assessment of banks’ ability to withstand economic health and shocks.

Some of the other vulnerabilities cited include cyber threats that take into account the interconnected nature of financial systems and their fragile liquidity in fixed income markets.

Banks also warned about the growth of cryptocurrencies and their volatility.

“Like other speculative assets, cryptocurrencies are vulnerable to significant and sudden price declines, and recently some Stablecoins have failed to meet their stability promises,” Carolyn Roger said. The vice governor said.

Banks also said that Russia’s invasion of Ukraine further complicates the transition to a low-carbon economy, and the great danger that assets exposed to the fossil fuel sector, such as those found in many Canadian pensions and retirement savings, are valuable. It is said to be exposed to much less than expected.

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