Bank of Canada warns tenants showing financial difficulties

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The Bank of Canada is expressing concern about the impact of higher interest rates on renters, while acknowledging that even as most households appear to be managing higher debt-servicing costs, there are still many headlines of mortgages that will face big increases in payments when they renew over the next year. next two and a half years.

Adjusting to higher interest rates “continues to present risks to financial stability,” Bank of Canada Governor Tiff Macklem said Thursday as the bank released its annual report on stresses across the financial system.

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Senior Lieutenant Governor Carolyn Rogers, who previously expressed concern about tenants, said the data compiled suggests there is stress in these households.

“After hitting record lows during the pandemic, the share of mortgage-free households that are behind on credit card and auto loan payments has returned to, or surpassed, typical levels,” he said. “And over the past year, the proportion of mortgage-free borrowers who have a credit card balance of at least 80 percent of their credit limit has continued to rise.”

Other issues highlighted in the report included “overstated” valuations of some financial assets, a sharp increase in the use of leverage by the non-bank financial sector and risks due to exposure to commercial real estate, where weaker demand has pushed the national office. unemployment rate up to around 20 percent.

Since the Bank of Canada began raising interest rates in March 2022, payments have increased on about half of all outstanding mortgages. Over the next two and a half years, a large portion of these mortgages will come up for renewal and these borrowers will face large increases in payments.

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“In the coming years, more borrowers will face pressure as they refinance existing mortgages at higher rates,” the report says. “Higher debt service costs reduce a household’s financial flexibility, making it more financially vulnerable if its income declines or it faces an unexpected material expense.”

The report showed that the average increase in monthly mortgage payments will be more than 20 percent at renewal in 2025 and more than 30 percent in 2026, compared to origination.

“Financial pressure will increase especially for households that took out a mortgage in 2021 and early 2022, when house prices were near their peak and mortgage rates were very low,” the report says. These buyers generally took out large mortgages relative to their income and have seen very little increase (and potentially a decrease) in the value of their home.

By the end of 2023, more than a third of new mortgages had a debt service ratio above 25 percent, double what it was in 2019.

The Financial Stability Report said large banks with healthy capital reserves are managing the strains in the mortgage market so far, but some smaller lenders have already seen a sharp rise in loan arrears.

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“Increased loan loss provisions are impacting profitability but also improving banks’ resilience,” the report says, adding that funding for banks remains stable, although costs have increased.

The report says small and medium-sized lenders are likely seeing more defaulted mortgages because their borrowers tend to have higher risk profiles. Additionally, with terms typically shorter, almost all of these borrowers have renewed. In contrast, around half of the big banks’ mortgages have not yet been renewed.

The Financial Stability Report suggested that with conservative pay increases, most borrowers should be able to get by, and that some are increasing savings and adjusting payments, even making lump-sum contributions. A larger shock to the financial system, including banks, would be felt with an impact on wages, such as an increase in unemployment.

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