Bank of Canada points to household debt as key risk in the country's financial system
CTV
The Bank of Canada highlighted early signs of financial stress among Canadian households as one of the key risks in the financial system. The unprecedented increase in interest rates has raised the costs for households, a vulnerability if a recession were to occur.
The Bank of Canada highlighted early signs of financial stress among Canadian households as one of the key risks in the financial system. The unprecedented increase in interest rates has raised the costs for households, a vulnerability if a recession were to occur.
“Elevated interest rates and declining house prices have reduced the financial flexibility of many households,” reads the bank’s Financial System Review released on Thursday.
Due to the increased expense of servicing mortgages, homebuyers have relied more on credit card debt, which has exceeded pre-pandemic levels.
The median debt service ratio of homebuyers, which looks at the gross income of households and the portion of it going towards paying off debt on their mortgages, has increased to 19 per cent in 2022. Close to 30 per cent of new mortgages have households paying a median of 25 per cent or more of their income to service their payments.
One-third of mortgages have seen an increase in payments since February of last year and all mortgages will have increased payments by 2025-26, when renewals occur.
The increase in costs will be highest among those households with fixed-rate mortgages, which will see their payments increase by 20 to 25 per cent in 2025 or 2026. Borrowers with fixed payments will see an increase of 40 per cent, that same year. Variable rate holders have already seen their payments go up by 50 per cent this past year.
The bank says households that bought into the housing market during its peak in pricing during the COVID-19 pandemic will face the most hardship moving forward.
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