The increase in rates equals an additional $15 billion in payments for homeowners every year
As households renew in the coming years, they are expected to see an increase in payments. This increase could represent an uptick of between 30% to 40% in their average monthly payment. However, homeowners will do what they can to continue making their mortgage payments on time. Canadian borrowers tend to prioritize their mortgage payment over all other debt payments and consumption choices.
The increase in interest rates represents an additional estimated $15 billion that homeowners will have to disburse every year to ensure their monthly mortgage payments are made on time.
As a practical example: for a $500,000 mortgage with a five-year fixed-rate term and 25-year amortization, an interest rate increase from 1.94% to 5.45%, which would lead to nearly a $1,000 increase to the monthly payment.
Available options for Homeowners
As homeowners experience changes to their financial situations, they will typically face a variety of options to try to make ends meet. These can include:
- choosing new mortgage loan terms that reduce debt-servicing costs, such as longer amortizations (see Residential Mortgage Industry Report — Fall 2023 report)
- cutting back on savings
- reducing the consumption of non-essential goods and services
- delaying major purchases
- preemptively selling their property
- prioritizing mortgage payments over those for other credit products such as credit cards, auto loans, or lines of credit
Ultimately, the additional $15 billion in mortgage payments will have to be reallocated from other sectors of the economy, including consumption and investments.
While Canadians find creative ways to make ends meet, further interest rate increases could mean additional pressure on households that are already struggling. Even if mortgage arrears remain stable at record-low levels, other delinquency indicators show an increasing share of Canadians struggling with their debt payments. This indicates that there may be broader financial strain on households. This is evident beyond just mortgage arrears and has implications for the overall financial health of individuals and families.
When looking into other debt payments, the increasing arrears suggest that financial stresses are intensifying for more households. In fact, delinquency rates of 90 or more days have increased in the past year for credit cards (+0.24%), auto loans (+0.22%), lines of credit (+0.16%) and home equity lines of credit (HELOCs) (+4%) (see Residential Mortgage Industry Report — Fall 2023 report)
According to CMHC’s 2023 Mortgage Consumer Survey, half of mortgage holders directly impacted by increased debt-servicing costs face difficulties maintaining certain payments, including mortgage payments. This jumps to 74% when including those who anticipate being impacted in the year to come.
CMHC is well positioned to sustain potential mortgage defaults
Default insurance is mandatory for mortgages where the borrower’s down payment is less than 20% of the purchase price. It provides lenders with insurance against borrower defaults while allowing borrowers with smaller down payments to obtain mortgage loans at competitive interest rates. Reduced risk ensures the availability of mortgage funding to homebuyers with lower levels of equity during an economic downturn, as the availability of mortgage credit is often reduced. This provides added stability to housing and financial markets.
The total mortgage insurance space has reached a record low in 2023. In fact, CMHC currently insures around 6.5% of all residential mortgages in Canada, and both arrears and claims remain at historical lows. In this context, CMHC’s exposure to renewal risk remains low.
Most of the risk associated with an interest rate shock lies in the uninsured space. Roughly 75% of residential mortgages in Canada are uninsured; a much higher proportion than in 2016, when only 45% of mortgages were uninsured. This shifting trend was partially caused by a sequence of regulatory changes, many that tightened mortgage insurance eligibility rules. Additionally, with high housing prices in many markets over the past decade, more properties are now near or above the allowed insurable limit of $1 million.
As Canadians face high levels of mortgage debt, additional financial pressures will weigh heavily on homeowners in the years to come. While they will continue to make the available choices to ensure they make their payments, overstretched borrowers are at greater risk of default. This risk is particularly pronounced in a slower economy.