Photo: James Bombales
Canadians who took on a mortgage in the last five years could be in trouble, according to a new report.
That’s because, after years of historically low interest rates, the Bank of Canada has raised the overnight rate by 50 basis points since July. A higher overnight rate influences lenders to hike mortgages, leading to larger monthly payments — and the Bank is forecasted to continue to raise the rate in the new year.
“Canadian households have become used to rates declining and staying low,” reads a report from Toronto-based credit ratings agency DBRS.
The agency says that, in an environment of lower interest rates, borrowers were generally able to renew their mortgages at a lower rate. Now, they’ll have to brace for higher payments.
“Canadian households could be entering unfamiliar territory: a sustained period with worse refinancing conditions,” reads the report.
Those who recently took on a mortgage will be hit hardest by the higher rates. According to DBRS, a 100 basis point rate hike would raise monthly payments by 9 per cent on a $400,000 mortgage with 20 years left.
Those with less time on their mortgage — who have less money to pay off, and whose incomes’ have increased since they first purchased their property — would see smaller increases.
But, according to Mortgage Professionals Canada Chief Economist Will Dunning, the number of households who will be unable to make their mortgage payments under higher rates will remain relatively low.
“I think people who have gotten mortgages in the last few years were aware that interest rates had been low for a long time,” Dunning tells BuzzBuzzNews. “Those people knew that they were likely to rise in the coming years, and they budgeted a cushion for themselves.”
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Even more uncommon? Canadians who will have to take on new sources of debt in order to make their monthly payments.
“I think the number of people taking on secondary debt because of this will be very small,” says Dunning. “As long as people are working, they should be able to budget in a way that allows them to make their payments.”
Not everyone is so optimistic about what higher interest rates could mean for Canadian households.
According to a review issued by the Bank of Canada in 2016, the portion of Toronto first-time mortgage borrowers who are highly indebted — those with a debt-to-income ratio 250 to 350 per cent — rose from 32 per cent in 2014 to 49 per cent in 2016.
“Over the last three decades, Canadian households have not had to adjust their spending to cope with higher mortgage rates,” reads the DBRS report. “Recent buyers in markets where house prices have been increasing rapidly may face greater risk, as their sensitivity to mortgage payment shock is highest.”