Canada

Canada Sees New Mortgage Payments Rise 12% As Low Rates Turn Toxic

Canadian households have much bigger mortgage payments, even with cheap debt. Or maybe because of cheap debt? The average mortgage payment in Q3 2021 showed a big jump, according to TransUnion data. Instead of lowering payments, low rates have fueled record home sales and refinancing. The increased demand has driven home prices higher leading to higher mortgage payments.

Canada Has Seen The Average New Mortgage Payment Rise 12%

Canadian home prices are surging and so are mortgage payments for new buyers. New mortgages had an average payment of $1,621 in Q3 2021, up 11.7% from last year. Over the past five years, the average has moved 20.3% higher. A lot of takeaways in those three numbers, but the most obvious is last year’s growth. In a five year period, more than half the growth in payment size happened over the past twelve months. That’s unbelievable growth.

Canadian Average Mortgage Payment

The average mortgage payment in the third quarter across Canada.

Source: TransUnion Canada; CMHC; Better Dwelling.

The Average Existing Mortgage Payment Increased 4% 

On the upside, cheap mortgage debt saved existing mortgage holders money, right? Not exactly. Their average payment hit $1,368 in Q3 2021, up 4.0% from last year. Over the past 5 years, the average moved 15.9% higher. Interest rates were cut by half during this period. Still, payments showed huge growth — with the past year representing nearly a third of it.

Canadian Average Mortgage Payment Change

The annual percent change for the average mortgage payment in the third quarter across Canada.

Source: TransUnion Canada; CMHC; Better Dwelling.

Holding Interest Rates Too Low, For Too Long

Central banks lower interest rates to stimulate demand for credit and raise inflation. The big emphasis is always on the initial cheap debt though, which is how the concept is sold to households. This benefit can be seen from 2019 to 2020, a period that saw an 85% decline in the overnight rate. It slashed checks chart* about $1 from the average mortgage payment. There’s a good reason for this — they cut rates to increase demand and inflation, not save you money. 

Bank of Canada (BoC) research from this year shows low rates do not help affordability. Over the past 30 years, households were sold on the idea low rates improve affordability. However, beyond the initial shock, that isn’t the case. The BoC found people adjust their borrowing and take out more debt when it’s cheap. Low rates played an active role in driving prices higher. No one thought to check the math on the narrative until 3 decades later. I mean, why would they? It’s not like credit and inflation are a central bank’s only job to execute.

Not everyone is a loser from low mortgage rates. A small share of people refinancing mortgages at the perfect time see lower payments. Their marginal propensity to consume is low, since these tend to be older and wealthier households. In plain english, a smaller share of the money they save goes back into consumption. 

Meanwhile, young households with a high marginal propensity to consume take a hit. They have to divert more money from consumption into shelter costs. This slows economic growth, and is unlikely to be made up by existing mortgages paying less interest. It’s getting easier and easier to understand why Canada is projected to have the slowest per capita GDP growth of any OECD country for the next 40 years.

17 Comments

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  • Trader Jim 5 months ago

    Good thing people don’t understand the difference between per capita GDP and GDP. Talk about per capita GDP and you see what’s actually happening.

    • Omar 5 months ago

      I understand it’s GDP divided by the number of people but I don’t see what the issue is. What am I missing?

      • Rob 5 months ago

        The pie gets bigger but with more people everyone gets a smaller slice. Or you could could consider it the law of diminishing returns due to the overuse of one factor of production (land,labour or capital)
        Analogy – there is a text book example which describes an increasing number of workers coming to help dig in a garden of limited size.
        One or two pairs of extra hands make the garden more productive, but as the number increases, the benefit falls, until, at extremes, there are so many people they are stomping on the plants and productivity collapses.

    • cholds 5 months ago

      I just did – that is really interesting. It would seem that the government’s drive to increase the population of Canada is primarily to drive total GDP at the expense of making every individual in the country poorer, especially in relation to the growth other nations are experiencing.

      It’s not strictly housing related, but that was a good read.

    • alvy young 5 months ago

      well i dont understand help me out here we have sold and sitting waiting somthing to turn in our favor

  • Mortgage Guy 5 months ago

    About 10% renewals and 20% new mortgages.

    Mind crumbling amount of equity withdrawals, which is when people withdraw equity for some other reason. They don’t usually mention why, just bank it and it’s almost certain this cash is being used for investment properties or bank of mom and dad down payments.

    There’s a reason Canada is trying to increase shared information across lenders for borrowing. A problem they would never bring up but is emphasized they need to change for no apparent reason very quickly.

  • MI 5 months ago

    the rich, the bank and the politicians are so greedy

  • Akash Brar 5 months ago

    I am not getting how come payments are that low- when average mortgage is alot higher. Mortgage industry seems fishy too

  • Heather 5 months ago

    OK. I just read about GDP per capita. Business Council of BC did a good article in August 2019. If I am translating this correctly, GDP may look OK, but it’s not helping the average worker. Or should I dare say, slave? Financially, Canada has got to be heading for a tumble. I wonder what else we don’t know about yet. What stats are false or deliberately misleading? Where else should we be looking?

    • V 5 months ago

      One day in the not so distant future the complicit will wake up and not recognize the world they live in. Memories of the not so distant past will seem like fantasy. Useful idiots.
      We are so screwed.

  • IthoughtWeWereSmarter 5 months ago

    We as a country, are so screwed!!

  • Richard Allen 5 months ago

    I realize this is just anecdote but my wife and I renewed, and increased our payments noticeably. But we did not take on more debt but instead shortened the amortization. I am quite concerned what will happen at the end of term. Your mileage may vary

  • Jared 5 months ago

    Oh man, I did the opposite… I extended my amortization. My thinking was with all this inflation the more debt you have, the better… I am just paying min payments on all debt now. Doesn’t make any sense to pay it off, the money I am saving from paying debt I can use to buy another house. The government is just making this too attractive of an option not to do

    • CMOS 5 months ago

      What happens if real estate prices crash on you?

      • Jared 5 months ago

        CMOS – if real estate prices crash then my plan would back fire lol.

        But… I think the risk of real estate prices crashing is super low. I just can’t see the BofC ever intentionally crashing the market. I see the opposite, if some outside factor causes house prices to fall (e.g. COVID), the BofC will intervene to ensure that house prices continue to increase by buying mortgage backed securities and ensuring that mortgage rates stay deeply negative in real terms. The Canadian govenrment has incentivized real estate investing and repeatedly commits to ensuring prices rise in the future. Someone said it before but I dont remember… “dont fight the fed”

    • V 5 months ago

      Hopefully you are not setting yourself up for a trap like many others are. Unfortunately, many people are borrowing to make up the income gap to cover the cost of living or maintain their current life style. Good luck.

      • Jared 5 months ago

        V – and those people will be rewarded generously. In a high inflation environment everyone with access to capital should be borrowing as much as possible. It is the only way to beat the income gap. If you don’t take on debt, the purchasing power of your wages erodes and you end up impoverished

        For example… if you make 70k per year and DIDNT own a house before COVID in BC, you went from being able to afford a detached house to being able to afford a one bedroom apartment. And that was in less than 2 years. Imagine what it will be like in 2024? I think you better be leveraging as much as possible to get as much debt as you can. The future is not bright for the non asset holder in this economic environment. And the government continues to signal that this is the way it will be in the future. Listen to Tiff Macklem talk a bit and you will see what I mean

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