High mortgage costs will ‘strain’ budgets. But is the Bank of Canada worried? – National

The Bank of Canada has warned that rising mortgage rates following the past year’s rapid policy rate hikes will test the finances of some Canadian households in the coming months.

The central bank’s latest forecast of the impact of higher borrowing costs on Canadians was released the same day it left the benchmark rate unchanged at 4.5%.

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Interest rates on Wednesday were 4.25 percentage points higher than the lows seen during most of the pandemic, when many Canadians jumped into the housing market with cheaper mortgage rates.

This results in higher monthly costs for homeowners on some variable rate mortgages and for homeowners renewing fixed rates.

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Comparison site, for example, estimates this year that the average Canadian homeowner who took out a variable-rate mortgage to buy a home in January 2022 will have , you would pay about $1,500 more each month for the same loan. Interest rate hike in Canada.

Click to play video: 'Options for homeowners struggling to pay their mortgage'

Options for homeowners struggling to pay their mortgage

Taking into account all liabilities on Canadians’ balance sheets, interest payments rose 45% annually in the final quarter of 2022 to a cumulative $133 billion, according to a Bank of Canada report released Wednesday. .

“As homeowners renew their mortgages, the percentage of income spent on interest payments will continue to rise,” the central bank’s quarterly monetary policy report read.

The Bank of Canada has projected how mortgage pain will affect Canadians’ budgets, based on market expectations of the central bank’s interest rate movements in early April.

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In that scenario, the interest portion of monthly mortgage payments as a percentage of Canadians’ disposable income would peak at 5.5% in the third quarter of this year. This is he the highest level of this figure since the 1990s, the report notes.

“Borrowers may be able to mitigate some of these increased costs. However, their budgets will continue to feel burdened by these costs over the next few quarters,” the bank’s monetary policy report said. has read.

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One important thing to consider, however, is that market forecasts include calls for rate cuts to start before the end of 2023. Bank of Canada’s Tiff his Macklem governor poured water on Wednesday.

“An implied rate cut that will be baked into the market curve later this year doesn’t look like the most likely scenario to us,” he told reporters.

Wednesday’s rate hold also included a warning that interest rates could be raised further “if necessary” to bring inflation down to the central bank’s 2% target.

The Bank of Canada did not rule out further rate hikes on Wednesday, but Ratehub co-CEO James Laird told Global News that the second consecutive rate hike should give Canadian mortgage holders some “comfort” about their monthly costs. ‘ should be given.

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“I think Canadians should think carefully about restoring stability, for example,” he said in an interview.

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Senior Deputy Governor Carolyn Rogers told reporters after the Bank of Canada’s interest rate decision that the housing market frenzy during the pandemic was “unsustainably high.”

She added that both sales and prices have “shrinked” as interest rates have risen sharply, although home prices remain above pre-pandemic levels.

Asked Wednesday whether Canadians’ high debt burden related to mortgages is a concern as interest rates remain high, Rogers said falling disposable income is a natural part of the interest rate cycle. said it was.

“It is for monetary policy to take effect, lowering demand in the economy and restoring its balance. We need inflation to return to target,” he said.

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How will the housing market react to keeping interest rates on hold?

Rising interest rates have changed Canadians’ preferences in the mortgage market, the Bank of Canada said in a report.

New borrowers increasingly prefer fixed-rate mortgages with terms of one to four years over popular five-year fixed-rate products and variable-rate mortgages that became more popular during the pandemic, central bank says pointed out.

“This suggests many borrowers expect mortgage rates to fall within the next few years,” the report read.

Click to play video: 'Rising interest rates lead to mortgage madness'

Rising interest rates lead to mortgage madness

Meanwhile, the Bank of Canada on Wednesday expected housing demand to pick up in the second half of 2023, supported by high immigration levels.

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Laird told Global News that there has been a slight increase in monthly housing activity.

“With mortgage rates stable, I think we can expect some buyers who have been on the sidelines to see how mortgages will change, perhaps entering the buying pool,” he said. I was.

Leah Zlatkin of said in a press release:

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Home prices and sales plummeted last year. Is this the bottom?

The average price of a home in the Toronto area reached $1,108,606 in March, compared with $1,096,519 the previous month, the Toronto Area Real Estate Commission announced earlier this month.

But the average price is still down nearly 15% from $1,298,666 last March, when the bidding war kept the market moving at a breakneck pace.

In Vancouver, the city’s real estate commission said the composite benchmark price for all residential properties in Metro Vancouver reached $1,143,900 last month, down 9.5% from March 2022 and up 1.8% compared to February. said.

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— Canadian Press, with files from Global News Ann Gaviola

© 2023 Global News, a division of Corus Entertainment Inc.

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