Trends in Mortgage Borrowing and their Implications

The Bank of Canada’s decision to raise interest rates in March 2022, and to do so 10 times in a 17-month timespan to tame inflation, has sent shockwaves through the Canadian real estate market, eroding housing affordability and hurting existing homeowners’ pocketbooks.

A recently released report by Canada Mortgage and Housing Corporation highlights trends in mortgage borrowing that have emerged as a result of the rate hikes. Here are three and their implications.

1. Overall mortgages in arrears are at historically low levels but other indicators like credit cards and auto loans show that an increasing number of Canadians are having some difficulty with their debt payments. Greater household debt burden will lower further economic growth since homeowners will often reduce their consumption of non-essential goods and services and delay major purchases to get by.

2. Amortizations continue to be longer than they were before the beginning of recent interest rate increases. In the first half of 2023, nearly two-thirds of newly extended mortgages had an amortization longer than 25 years, compared to only half in 2020. Longer amortizations lower borrowers’ monthly mortgage payments but increase the amount of interest paid over time. In instances where home loans have ballooned by years and sometimes decades, this can lead to negative amortization mortgages — when a borrower pays less than the amount that will result in paying down the principal, so the loan amount actually increases.

3. Over the next two years, 45% of all outstanding mortgages in Canada will be facing interest rate shock. Most of these borrowers contracted their fixed rate mortgages at record-low interest rates and, most likely, at or near the peak of housing prices around 2020–2021. As households renew in the coming years, they are expected to see an increase in their average monthly payments that could represent an uptick of between 30% and 40%. For 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% would lead to nearly a $1,000 increase to the monthly payment.