Canadian borrowing is losing steam just as interest rate hikes come back into focus. Bank of Canada (BoC) data shows mortgage credit posted its smallest August increase since 2013, pushing annual growth to a pace rarely seen outside housing corrections. With nearly a third of new mortgages carrying variable rates, renewed tightening could further throttle slow activity.  

Residential mortgage debt advanced 0.3% (+$7.1 billion) to $2.45 trillion in August. That was unusually slow, marking the smallest August increase since 2013. Annual growth decelerated for a tenth straight month, leaving the balance only 3.8% (+$89.1 billion) higher than last year. It’s a slump that’s catching the attention of at least one Big Six economist. 

“In August, household mortgage debt grew just 3.8% y/y, the slowest pace since the worst of the housing correction in 2023-24 (and before that, since the early 2000s),” explained Shelly Kaushik, senior economist at BMO Capital Markets.

Ontario & BC Slump, Weak New Condo Demand Slows Growth

The weak credit growth serves as a reminder that market stabilization isn’t the same as normalization. While the national market is stabilizing, it’s masking the prolonged slump in BC and Ontario. Weak demand in these regions, along with weak new condo demand in general, “has kept a lid on the recent recovery in borrowing,” according to Kaushik.  

The data highlights another area the Bank of Canada (BoC) may be watching, explains Kaushik. “Canadian monthly credit aggregates, which typically fly under the radar, highlighted an ongoing slowdown in the economy’s most interest-rate-sensitive sector just as the Bank of Canada may be looking more closely at raising rates.”

Rate Hikes May Add To Mortgage Payment Stress

Bond yields are surging higher, but housing demand remains relatively weak.  “Suffice it to say the housing market isn’t exactly in need of extinguishing,” says Kaushik. Variable-rate loans accounted for roughly 30% of new mortgages in Q2, according to BoC data cited by BMO, leaving those borrowers exposed to renewed rate hikes. 

“Indeed, a new tightening cycle could add payment stress to variable rate mortgage holders,” she warns. Mortgage borrowing is already struggling to regain momentum. Renewed tightening could add further pressure to both the recovery and the households carrying that debt.