Rising Financial Stress Among Homebuyers - Bank Of Canada

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The Bank of Canada is worried about people being able to pay their debts as interest rates increase. People are using credit cards to pay for things because their mortgage payments are more expensive.

Households are starting to face financial stress, according to the bank's review. This means they have less money to spend. People who recently bought a house are taking longer to pay off their loan. They do this to make their payments easier. In the last year, the number of new mortgages with more than 25 years to pay increased from 41% to 46%.

New mortgages where payments take up over 25% of a borrower's income doubled to 29% in 2022.

If you have a longer amortization period, it can make it harder to build equity in your home. And if you have a high debt service ratio, you might have trouble if something unexpected happens, like your expenses go up or you lose your income. Also, home prices have gone down by 14% since last year.

Bank of Canada policymakers are feeling pressure due to worries about household debt. They need to balance controlling inflation while avoiding a bad recession. Canadian households have a lot of debt, making the economy highly sensitive to interest rate increases. Some experts think the Canadian economy will react quicker than other countries to higher interest rates.

The central bank said that many households will have financial problems in the future. This is because they have to renew their mortgage. People have less money because their houses are now worth less. People who just bought a house are having trouble with their money.

More households that owe money are falling behind in their credit payments for over two months. This has been happening since around mid-2022. Many people bought homes recently and now depend more on credit cards. This has resulted in more people having an unpaid balance on their cards compared to before COVID.

People who bought a house with a mortgage from 2020 to 2022 owe 17% more credit card debt compared to those who bought between 2017 to 2019. They are also struggling more to pay back their credit card debts, and the arrears are almost the same as before the pandemic.

Many mortgages have increased payments since February 2022 due to a banking campaign to boost rates by 425 basis points. By 2026, almost all mortgage holders will experience payment increases, according to the central bank. The median payment increase will be around 20% if market expectations remain consistent over the 2023-26 period.

Canadian banks are facing increased funding costs due to instability in US regional banks. This could cause consumer rates to rise. However, spillover effects from the US have been minimal in Canada.

The Canadian central bank said that if there is a severe recession, the banks in the country could face pressures. This can happen through credit and funding channels. If unemployment increases and house prices drop, banks may face losses. The market sentiment may also affect their funding costs. This will make banks reduce the credit supply to households and businesses. This will also affect liquidity for non-bank financial intermediaries.

The Bank of Canada will make a rate decision on June 7th. Most economists surveyed by Bloomberg think the bank will maintain the current borrowing cost of 4.5%. That's even though inflation has gone up and there are lots of available jobs.