If you had a mortgage since before the Bank of Canada started hiking rates in March 2022, chances are you will be facing a payment increase before the end of 2025.
That’s according to a new research report from the Bank of Canada, which estimates that 80% of those borrowers will be subject to a “relatively large” mortgage payment increase by then.
It adds that about 45% of borrowers who had a mortgage prior to March 2022 have already seen their payments increase.
Based on current market expectations that interest rates have peaked but will remain above pre-pandemic levels, the Bank of Canada researchers expect the median monthly mortgage payment will rise from $1,200 in February 2022 to $1,600 by the end of 2027—a 34% increase.
“But as financial markets expect interest rates to begin decreasing in 2024, payments also moderate slightly by the end of 2027,” the report reads. However, if interest rates remain at their October 2023 levels for an extended period of time, borrowers would instead face an estimated 44% increase in their payments.
Impact on fixed-payment variable rate borrowers
Increases are expected to be even higher for those with a fixed-payment variable rate mortgage.
While their payments will remain the same throughout the term of the mortgage (unless they reach their trigger point and are required to take action sooner), those borrowers will face a steeper rise in their payments at renewal, which for many will take place in 2026 and 2027.
“…the median payment for this mortgage type increases sharply in those years, reaching $2,190 by the end of 2027—an increase of 54% from the February 2022 level,” the Bank says.
The Bank of Canada report does note that its estimates likely overestimate the size of payments at renewal since its scenario assumes all borrowers will renew into the same type of product. It also assumes borrowers will take no action, such as refinancing or making prepayments, prior to their renewal, but acknowledges some are likely to do so.
Ability to handle payment increases will depend on income growth
The research goes on to say that borrowers’ ability to handle these payment increases will depend largely on their income growth over the remainder of the term.
In a scenario that assumes no income growth, the mortgage debt service ratio—or mortgage payments as a share of pre-tax income—would increase by four percentage points for all mortgages outstanding, rising from 16% in February 2022 to 20% by the end of 2027.
However, assuming income growth of 2.4% per year, which is the average growth rate according to Statistics Canada from 2014 to 2023, the MDSR would increase by just 1.5 percentage points.
“As long as they continue to experience income growth, most mortgage borrowers will not face severe financial stress from the increase in mortgage payments over the coming years,” the researchers say. “However, borrowers who stretched to enter the market or who were anticipating rate decreases by the time of renewal may find the adjustment more difficult.”
A severe recession that led to a sharp rise in unemployment would also “challenge the ability” of many borrowers to make their payments.
“This could lead to credit losses for lenders if mortgages exceed property values,” the report says. “In turn, it could also tighten lending conditions, making it more difficult and expensive for Canadian households to access credit.”
Current mortgage market statistics
The report also provided some interesting mortgage market stats. Here are some of the highlights:
- Borrowers with true variable rates (e.g., adjustable-rate mortgages where payments rise and fall based on changes to the prime rate) have already seen their median payments rise 70% as of November 2023 compared to the end of February 2022.
- Variable rates with fixed payments (VFMs) are more common, comprising about 75% of variable-rate mortgages.
- Up to 80% of VFMs at federally regulated lenders had reached their trigger rate, meaning the interest rate comprises the entirety of the mortgage payment.
- Based on lender-specific policies, at most one-quarter of VFMs have reached their trigger point and been subject to a mandatory change in payment. This is because some lenders, like RBC, require borrowers to increase their mortgage payment as soon as they reach the trigger rate, while others—like TD, BMO and CIBC—allow the interest shortfall to be added to the balance of the loan up to a certain threshold.