Difficult rate hikes for some new owners
For the Bank of Canada, the increases interest rate changes will be more painful for homeowners who have opted for variable rate mortgages.
Interest rate hikes will be more painful for new homeowners who bought their homes with a variable-rate mortgage, Bank of Canada Deputy Governor Carolyn Rogers noted Tuesday. /p>
Speaking at a speech to Young Canadians in Finance in Ottawa, the Senior Deputy Governor said the proportion of households with variable rate mortgages has increased over the past year. .
These mortgage holders are particularly hard hit by interest rate increases.
Mortgage costs have already risen. increased for some Canadians and will likely eventually increase for others, making home ownership more expensive, 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 rising interest rates, buyers who have chosen an adjustable rate mortgage are seeing their borrowing costs increase.
According to new research from the central bank, variable rate mortgages now account for about one-third of all mortgage debt in the country, up from about one-fifth of the total at the end of 2019.
Three quarters of variable rate mortgages have fixed payments. However, the portion devoted to interest expense rather than capital is adjusted when interest rates rise.
If the interest expense; monthly interest exceed monthly mortgage payments, the borrower reaches the limit rate, in which case they may need to increase their monthly payments.
The Bank of Canada estimates that the percentage of Canadian mortgages that have reached their limit rate is 13%. Since March, the Bank of Canada has raised its key interest rate six times in a row, thus beginning one of the fastest cycles of monetary tightening in its history.
Its policy rate rose from 0.25% to 3.75% and is expected to rise further as the Bank of Canada attempts to stifle inflation, which is at its highest level in decades.
Rising interest rates have slowed activity in the housing market and lowered prices, but these effects are being offset by rising mortgage costs. Ms. Rogers' speech focused on the stability of the Canadian financial system and the role that housing plays in it in an environment of rising interest rates.
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The Senior Deputy Governor pointed to high housing prices and debt in Canada as two vulnerabilities that have been present in the system for years. Now that interest rates are also rising, Ms. Rogers believes the risks to financial stability are high.
However, she added that the Bank of Canada is x27;expects the financial system as a whole to be able to withstand this period of stress.
It's thanks to safety measures like stress testing mortgage, she argued, that Canadians were able to ensure that they could still afford to pay for their homes if interest rates were to rise.
< p class="e-p">I'm not saying that to downplay the very real difficulties some people are having, Rogers said. Higher mortgage payments are difficult for many people to manage, and even more so when other prices go up as well.
Deputy Governor reported that the Bank of Canada has released a Financial Vulnerability Indicators Dashboard on its website.