Due to high mortgage rates, we can expect a large increase in mortgage payments as mortgage extensions occur in the coming years.
Shortly before the Bank of Canada’s monetary tightening began in March 2022, it was possible to negotiate a 5-year mortgage at an interest rate between 2.79% and 3.0%. Today the rate for this term fluctuates between 5.6% and 6.4%.
According to Statistics Canada, the current outstanding “mortgage debt” of Canadian households reached a staggering $2,129 billion in the second quarter of 2023.
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If all Canadian households renewed their mortgages at 6.0% over the next year, 12-month mortgage payments would reach $163.5 billion, an increase of $42.6 billion (+35%) compared to an extension at the old interest rate of 3%.
You read that right. Mortgage payments would increase by 35% compared to what Canadian households were paying before the Bank of Canada’s spectacular increase in the key interest rate, which rose from 0.25% (in February 2022) to 5.0% today.
Per $100,000 mortgage
More specifically, this represents a spectacular increase in mortgage payments per $100,000 mortgage amortized over 25 years.
Monthly payments will increase from $473.25 to $639.81, an increase of $166.56 per month.
This represents an additional expense of almost $2,000 per year and $100,000 in mortgage. For a property that has a $300,000 mortgage, the annual increase in mortgage payments is $6,000. For a $500,000 mortgage, it’s $10,000 more. Etc.
Huge household debt
To show you the extent to which outstanding mortgages ($2,129 billion) are weighing heavily on Canadian household debt, note that they alone account for almost three-quarters (73.3%) of total debt.
The remaining household debt amounts to around $773 billion. This includes credit card balances (from major issuers, department stores, gas stations) as well as auto loans, lines of credit, student loans and other institutional bank loans.
Overall, Canadian household debt currently stands at $2,902 billion, which is $100 billion more than Canada’s GDP.
It’s colossal. Since the Bank of Canada began tightening monetary policy barely a year and a half ago, Canadian debt has increased by $209 billion.
More worrying data
While mortgage debt has increased by $173 billion since the Bank of Canada began raising interest rates, the market value of Canadian households’ housing stock has fallen by $435 billion since its peak in March 2022.
Economists believe that real estate prices could continue to fall due to high mortgage interest rates.
The six major Canadian banks appear to dominate the mortgage loan market with a market share of 74.2%. Desjardins and other credit unions hold 20.3% of the market. Insurance companies, trusts and private lenders hold the rest.
CMHC at bat
Of the total $2.129 billion in outstanding mortgages, you should know that approximately $600 billion of mortgages (28%) are insured by CMHC and private insurers. CMHC alone insures $400 billion in mortgages.
The number of delinquent mortgages is currently very low.
Unfortunately, however, the situation risks worsening in the coming semesters as more and more mortgages are renewed at mortgage rates that are twice as high as at the start of last year.
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