A new Bank of Canada report says a household that spends a large portion of its income on mortgage payments may be more vulnerable to financial stress
A growing share of Canadians are spending a worryingly high proportion of their earnings on mortgage payments, according to new Bank of Canada data, a potential sign of stress on borrowers.
“A household that spends a large portion of its income on mortgage payments may be more vulnerable to financial stress,” the bank said in a report that tracks financial vulnerabilities such as the debt service ratio, which is the share of income used to service debt. “While the share of indebted households behind on their payments remains below pre-COVID averages, the data suggests that might not hold true for very long. Indeed, rates of other loans in arrears are already rising,” Royce Mendes, an economist and head of macro strategy at Desjardins Capital Markets, said in a note to clients.
But because the bulk of variable-rate mortgages have a fixed monthly payment, many of those borrowers have not yet had to increase their monthly payment. Instead, with every interest rate hike, more of their payment goes toward the interest and less toward reducing the original size of the loan. That, in turn, extends the amortization period, or the length of time it takes to pay off the loan.
“That is a segment of economy that we watch closely. It’s always important to keep in perspective the size of that segment,” Bank of Canada senior deputy governor Carolyn Rogers said at a news conference this week.
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