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Recent homebuyers with variable-rate mortgages will find the adjustment to higher interest rates more painful, said Bank of Canada senior deputy governor Carolyn Rogers.
Speaking before the networking group Young Canadians in Finance in Ottawa Tuesday, the senior deputy governor said the share of households with a variable-rate mortgage has increased over the last year.
These mortgage holders are especially affected by interest rate hikes.
Housing activity boomed during the pandemic as Canadians rushed to take advantage of low interest rates. Now, as interest rates climb back up, recent homebuyers with variable-rate mortgages are seeing their borrowing costs go up.
New research from the Bank of Canada finds variable-rate mortgages now account for about one-third of total outstanding mortgage debt, up from about one-fifth at the end of 2019.
Three-quarters of variable-rate mortgages have fixed payments. However, the portion going toward interest costs rather than the principal is adjusted when interest rates increase.
If monthly interest charges exceed the monthly mortgage payments, the borrower reaches the “trigger rate,” at which point they may need to increase their monthly payments.
The Bank of Canada estimates the percentage of Canadian mortgages that have reached this trigger rate is 13 per cent.
Since March, the Bank of Canada has raised interest rates six consecutive times, embarking on one of the fastest monetary policy tightening cycles in its history.
Its key interest rate has increased from 0.25 per cent to 3.75 per cent and is expected to rise further as the Bank of Canada attempts to quash decades-high inflation.
Higher interest rates have slowed activity in the housing market and brought prices down, but offsetting those effects are rising mortgage costs.
Rogers’s speech focused on Canada’s financial system stability and the role housing plays in it amid rising interest rates.
The senior deputy governor said high housing prices and debt loads in Canada are two vulnerabilities that have existed in the system for years.
Now that interest rates are also rising, Rogers said risks to financial stability are elevated.
However, the senior deputy governor said the Bank of Canada expects the financial system as a whole to withstand this period of stress.
That’s thanks to safeguards such as mortgage stress tests, she said, which ensure Canadians can continue to afford their home purchases if interest rates rise.
“This is not to minimize the very real hardship that some are feeling,” Rogers said. “Higher mortgage payments are difficult to handle for many people – and all the more so when other costs are going up.”
Rogers said the Bank of Canada has launched an interactive dashboard on its website that tracks financial vulnerability indicators.