Homeowners had gotten used to low interest rates. While mortgage rates around 6 to 7% have been common in Canadian financial history, the mortgage holders of today are facing the fastest and largest increase in interest rates to this level in over 4 decades. This steep interest rate hike is coinciding with a time when households are facing historically high levels of debt and higher cost of living.
As high inflation persists, a higher-for-longer interest rate environment might be emerging. This raises questions around the:
- growing financial pressure on mortgage holders, and
- the impact that their resulting decisions could have on the overall economy.
In a context where mortgage holders will be paying higher interest rates for a longer period, housing affordability remains an issue. These borrowers may find themselves in more precarious financial situations. As a result, these larger mortgage payments are making the Canadian economy more susceptible to negative shocks or downturns.
Many mortgage consumers have already experienced the effects of higher rates. In fact, since the beginning of the rate hike in March 2022, 1 out of 3 borrowers have gradually seen their monthly mortgage payment increase. This is particularly true for those who have a variable rate term on their mortgage loan.
Additionally, in the first half of 2023, more than 290,000 mortgage borrowers renewed their mortgage with a chartered bank at a higher interest rate: from 5.45% for a 5-year fixed rate to 7.38% for a variable rate.
In 2024 and 2025, an estimated 2.2 million mortgages will be facing interest rate shock, representing 45% of all outstanding mortgages in Canada. Most of these borrowers contracted their fixed-rate mortgages at record-low interest rates and, most likely, at or near the peak of housing prices around 2020 – 2021. This holds true for both households who took out a mortgage when buying their new home. It also applies to the numerous existing homeowners that used the increased equity on their property by refinancing and taking cash out for consumption.
The total amount of mortgage loans to be renewed during this period represents over $675 billion, which represents close to 40% of the Canadian economy (2022 Gross Domestic Product).