Difficult rate hikes for some new owners

Speaking during a speech to the group Young Canadians in Financein Ottawa, the senior lieutenant governor noted that the share of households with variable-rate mortgages has increased over the past year.

These mortgage holders are particularly affected by interest rate increases.

Mortgage costs have already risen for some Canadians and will likely eventually rise for others, making home ownership more expensiveMs. Rogers said in the text of her speech.

Real estate activity has exploded during the pandemic as Canadians rush to take advantage of low interest rates. Today, with the rise in interest rates, buyers who have opted for a variable rate mortgage are seeing their borrowing costs rise.

According to new central bank research, variable rate mortgages now account for about a third of all mortgage debt in the country, up from about a fifth of the total at the end of 2019.

Three-quarters of variable-rate mortgages have fixed payments. However, the part allocated to interest expenses rather than capital is adjusted when the interest rate rises.

If the monthly interest exceeds the monthly mortgage repayments, when the borrower limit ratein which case he may have to increase his monthly payments.

The Bank of Canada estimates that the percentage of Canadian mortgages that have reached their cap rate is 13%. Since March, the Bank of Canada has raised its key interest rate six times in a row, initiating one of the fastest monetary policy tightening cycles in its history.

Its key rate has risen from 0.25% to 3.75% and is expected to rise further as the Bank of Canada tries to tame inflation, which is at its highest level in decades.

Rising interest rates have slowed activity on the housing market and lowered prices, but these effects are offset by rising mortgage costs. Mrs. Rogers’ speech focused on the stability of the Canadian financial system and the role housing plays in it in an environment of rising interest rates.

A robust financial system?

The senior deputy governor pointed out that high housing prices and indebtedness in Canada are two vulnerabilities that have been present in the system for years. Now that interest rates are also rising, Rogers says the risks to financial stability are high.

However, she added that the Bank of Canada expects the financial system as a whole to be able to weather this period of stress.

It was through safeguards like mortgage stress tests, she argued, that Canadians were able to ensure they would still be able to afford their homes if interest rates rose.

I do not say this to minimize the very real difficulties that some people experiencesaid Mrs. Rogers. Higher mortgage repayments are difficult for many to cope with, and it is even more difficult when other prices also rise.

The Deputy Governor noted that the Bank of Canada has published a Financial Vulnerabilities Dashboard on its website.