Canada’s real estate frenzy fallout is only just beginning, according to its central bank. The Bank of Canada (BoC) published their latest Financial System Review (FSR) today, with mortgage repayment presenting a threat to the economy. They forecast that existing borrowers will see their payments climb significantly by 2025, especially if borrowers don’t extend the repayment term.
Canadian Mortgage Borrowers To See Payments Rise 20% Higher
Canada’s central bank sees mortgages causing some economic risks for the country. Borrowers are looking at significantly higher payments, after rate normalization. “By 2026, nearly all mortgage holders will have seen their payments increase,” wrote the BoC.
Both fixed- and variable rate mortgage payments will have climbed by the end of 2026. The median payment is estimated to be 20% higher than February 2022, before rate hikes. They estimate the average fixed rate borrower will see their payment increase between 20% and 25% during this period.
Mortgage Payments Need To Climb 40% To Prevent Longer Terms
The above number includes amortization extensions. This is when the repayment term is lengthened to bring down payments, at the expense of more interest. If original repayment timelines are maintained, the central bank estimates payments will have to climb closer to 40% for fixed rate borrowers.
Variable rate borrowers were already hit, reminds the BoC. They estimate payments have climbed around 50% since February 2022, and climbed with each hike. This segment represents a small share of total mortgages in Canada, and only really became popular with investors recently.
Canada’s Rising Mortgage Payments Will Be “Manageable For Most”
The setup won’t exactly be a good time, but the central bank doesn’t see significant risk. Borrowers have been stress tested since 2018, giving the BoC some confidence in having a payment cushion. They also remind us that incomes have climbed since then, helping to offset some of the impact of rising rates. Not to mention borrowers who bought prior to 2020 have significantly smaller mortgages, with a big ole’ equity cushion to help out in a worst case scenario.
Rising payments are manageable for “most,” but they are counting on some households feeling the pinch. A combination of higher debt service levels, lower home equity, and longer amortization schedules can leave some borrowers more vulnerable to shock. Though every shock has brought in a cushion accompanied by moral hazard.
The BoC appeared to only really focus on defaults as a risk of higher payments and longer amortizations. However, rising payments means households will divert more cash to non-productive assets already purchased. That’s going to present a weight on the economy, limiting the growth.
As for longer amortizations, Canada’s bank regulator recently warned they can prop up prices. Maintaining market inefficiencies creates all kinds of issues, from diverting more capital from other areas of the economy, to creating further moral hazard.