Home Economy The Bank of Canada labels homebuyers facing trigger mortgage rates as at-risk

The Bank of Canada labels homebuyers facing trigger mortgage rates as at-risk

by SuperiorInvest

The bank estimates that around half of variable-rate and fixed-rate mortgages have reached their trigger rates

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Bank of Canada Deputy Governor Carolyn Rogers acknowledged that rising rates are putting more pressure on young Canadians — especially if they bought a home during the pandemic.

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Rogers called rising household debt rates a growing risk to the financial system, which has escalated during the pandemic as Canadians piled on mortgages when interest rates were at historic lows. The central bank’s cycle of aggressive rate hikes, which brought the benchmark interest rate from near zero at the start of the year to 3.75 per cent, is starting to take its toll on heavily indebted young Canadians.

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“We know that higher interest rates are difficult for many Canadians – especially young Canadians – many of whom are recent home buyers and therefore carry higher debt burdens,” Rogers said in a statement. speech November 22 before the Ottawa chapter of Young Canadians in Finance.

Rogers pointed to inflation, volatility in commodity and financial markets, as well as increased debt levels as risks to financial stability. Debt is a particular concern as borrowers on variable rate mortgages are now reaching their “trigger rates” – the point at which monthly mortgage payment it only covers the interest and does not repay the principal.

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“One group of Canadians who will be hurt by this adjustment are those who have recently purchased a home, potentially stretching their budget because of it, and who have chosen a variable rate mortgage,” Rogers said. “This is not a large share of households, but it is larger than historical trends would suggest. This is because more Canadians have opted for variable rate mortgages in the past year than in the past when housing prices were high.”

Bank of Canada estimates that variable-rate mortgages make up about one-third of total outstanding mortgage debt, an increase of about 20 percent since the end of 2019.

About 50 per cent of variable-rate and fixed-rate mortgages – or nearly 13 per cent of all Canadian mortgages – have already reached their trigger rates where monthly mortgage payments may increase.

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Royce Mendes, managing director and head of macro strategy at Desjardins, said the Bank of Canada is now starting to see the effects of the mortgage rate hike campaign.

“We estimate that almost all variable rate mortgages taken out between approximately May 2020 and July 2022 are now in this position. [trigger rate]Mendes wrote. “The more monetary policymakers raise rates, the more interest these borrowers will owe. But as Bank of Canada research suggests, that doesn’t necessarily mean all of those homeowners will have to top up payments. Some lenders will allow negative amortization.”

Safeguards have been in place since the 2008 global financial crisis to cushion the impact of such economic shocks, said Rogers, who also noted that higher capital requirements and liquidity levels for banks should protect the stability of the financial system.

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“Here at home, the measures also included a borrower-level mortgage stress test to ensure Canadians can afford their homes even if interest rates rise,” Rogers said. “And importantly, we do not expect a sharp economic downturn with the kind of large job losses typical of past recessions.”

During a November speech in labor markets, Bank of Canada Governor Tiff Macklem argued that Canada’s high level of job vacancies could provide a buffer to curb layoffs in the next downturn.

But central bank chiefs noted that young Canadians in particular are feeling the pressure of high inflation and rising interest rates on loans.

“High inflation is something we haven’t seen in Canada in over three decades, which means many in this room are experiencing it — and the stress that comes with it — for the first time,” Rogers told students at the University of Ottawa. .

“It’s undoubtedly frustrating to face the uncertainty of inflation and the impact of higher interest rates when you’re just establishing yourself financially – building your career, buying a house, starting a family.”

• By e-mail: shughes@postmedia.com | Twitter:

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