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

Canadians will continue to feel the pain of higher interest rates on their mortgages this year, the Bank of Canada warned as it reaffirmed its rate hold on Wednesday.

The Bank of Canada is warning that higher mortgage rates tied to its rapid policy rate hikes over the past year will test some Canadian households’ finances in the months to come.

The central bank’s latest projections about the impact of higher borrowing costs on Canadians come the same day it held its benchmark interest rate at 4.5 per cent.

Wednesday’s rate is 4.25 percentage points higher than the rock-bottom lows seen through most of the pandemic, when many Canadians took advantage of cheaper mortgage rates to jump into the housing market.

That’s driven monthly costs higher for homeowners on some variable-rate mortgages and for those renewing fixed-rate terms.

For example, an estimate earlier this year from comparator site Ratehub.ca showed that the average Canadian homeowner who took out a variable rate mortgage to buy a home in January 2022 would be paying roughly $1,500 more per month on the same loan after the last Bank of Canada rate hike.

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

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

The Bank of Canada ran a projection for how that mortgage pain might play out on Canadians’ budgets based on the market’s expectations for the central bank rate path at the start of April.