Canadian mortgage rates are rising and it’s squeezing the country’s highly indebted households. National Bank of Canada (NBF) warns mortgage borrowers will see more income go to debt servicing soon. However, the share of income mortgage borrowers will divert to debt servicing isn’t much at the national level. Most Canadians don’t have a mortgage, and already own their home. By itself, rising rates and household debt isn’t expected to be the trigger for a recession.
Canadian Mortgage Borrowers To See Up To 6% More Income Lost To Rising Interest Rates
Canada’s highly indebted households are (mostly?) going to be fine, but it’ll cost them a lot more. The bank estimates those who borrowed at 4.5x gross annual income can see their payments rise between $187 and $281 per month. That would absorb between 2.6% to 6.0% of their net disposable income. Not as bad as the current rate of inflation, and borrowers were stress tested for that. However, it’s still going to be a diversion of income from regular consumption.
It’s A Minimal Amount of Lost Income At The National Level
Canadians are highly indebted but that debt is largely concentrated in higher income households. Zoom out and the bank estimates it will only result in a loss of 0.65% disposable income at the national level over the next 3 years. “The amount is significant but manageable in that it alone will not suffice to pull the economy into a recession,” wrote Matthieu Arseneau, NBF’s deputy chief economist.
Seems kind of low? Despite Canada’s astronomical mortgage debt, the vast majority of households have none. NBF estimates just 35% of households have mortgages and will have to deal with rising rates. All households have to deal with rising inflation if it’s not tackled though.
Rising Mortgages Costs Aren’t Enough To Cause A Recession
The bank emphasized while it’s a substantial loss of income to debt servicing, it’s not enough by itself to cause a recession. That doesn’t mean a recession isn’t coming, just higher rates alone aren’t enough to trigger it.
Combined with a negative wealth effect it can be a bigger issue. A wealth effect is when people spend because their assets increase in value and they feel wealthier. A negative wealth effect is the opposite, where people pull back on spending after seeing a drop in their asset values. With equities and home prices potentially correcting, a recession is still a very real possibility, warns the bank.
Though it won’t just be due to higher mortgage payments, so there’s that.
$187-$281 per month???$800k housing index benchmark price with 80% Mortgage would be $640k. If a variable rate increases from 1.5% to 3.5%, it translates to $800 vs. $1867 monthly interest expense… The P+I payment can’t be just $200-ish…
Even use 4.5x of the median income of $55,700: a $250k mortgage. The payment difference is still on the high-end bound of the $280-ish bound.
And if we calculate according to that $187-$281 translate to 2.6-6% disposable income, the annually pretax income would be in the $48k – $200k range 4.5x will equal to $216k to up to $900k loan. 2% increase should be $4320 to $18000 per year…
Someone really shouldn’t work for a bank…
They say a rise of 287 dollars per month is not a big deal but on the other hand there’s this:
More than 50% of Canadians are within 200 dollars of not being able to pay their bills. That was last year before we had >10% inflation.
https://www.globenewswire.com/news-release/2021/04/08/2206577/0/en/Over-Half-53-of-Canadians-Within-200-of-Not-Being-Able-to-Cover-Their-Bills-and-Debt-Payments-Up-10-Points-Since-December-Reaching-a-Five-Year-High.html
Only 35% of Canadians have mortgages??? Sure, I’ll bite. My mortgage is in my name only but as far as my wife and I are concerned it is OUR mortgage. Does that mean only 50% of the adults in our household technically have a mortgage? We have 2 children. Does that mean only 25% of our household has a mortgage? Even if that 35% number isn’t completely cooked, does it count the additional Canadians that have HELOCs or reverse mortgages off the equity in their homes?
It’s generally understood that when NBF says 35% of Canadians, they’re referencing households. Most people don’t need them to say “5% of the population is babies who likely don’t have a mortgage yet.”
The mortgage is on the property, not a person. Your wife’s name doesn’t need to be on the mortgage, it’s registered on the title that your spouse would be on.
If your spouse isn’t on the title, your situation isn’t normal since most people have their spouse on title to ensure they aren’t kicked out and have to argue with the bank in the event of your death. Same reason you should have her on the mortgage tbh.
Re: Canada’s Rising Mortgage Rates Is Bad News For Borrowers, But Not The Economy: NBF
Translation:
Canada’s Rising Mortgage Rates Is Bad News For Borrowers, But Good News for Banks: NBF