Bank of Canada flags homebuyers facing mortgage trigger fees as risk

About half of variable-rate, fixed-payment mortgages have reached their trigger rates, bank estimates

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

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Rogers pointed to rising household debt rates as a growing financial system risk, which intensified during the pandemic as Canadians piled on mortgages when interest rates were at record lows. The central bank’s aggressive rate hike cycle, which raised the policy rate from near zero at the start of the year to 3.75%, 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, particularly young Canadians, many of whom are recent homebuyers and therefore have a higher debt load,” Rogers said in a statement. . November 22 speech before the Ottawa chapter of Young Canadians in Finance.

Rogers pointed to inflation, volatility in financial and commodity markets, as well as rising debt levels as risks to financial stability. Debt is a particular concern because variable-rate mortgage borrowers are now reaching their “trigger rates,” the point where the monthly mortgage payment it only covers the interest and does not pay the principal.

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“One group of Canadians who will find this adjustment painful are those who have recently purchased a home, which could stretch their budget to do so, and who have chosen an adjustable-rate mortgage,” Rogers said. “This is not a huge portion of homes, but it is larger than it would have been based on historical trends. This is because more Canadians took up an adjustable rate mortgage in the last year than in the past, at a time when house prices were high.

the bank of canada Dear that variable-rate mortgages account for about a third of total outstanding mortgage debt, an increase of about 20 percent since the end of 2019.

About 50 percent of variable-rate, fixed-payment mortgages, or nearly 13 percent 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 Group, said the Bank of Canada was now beginning to see the effects of its rate-hike campaign on mortgages.

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

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

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“Here at home, these measures also included a borrower-level mortgage stress test to ensure Canadians could continue to pay for their homes when interest rates rose,” Rogers said. “And most importantly, we don’t expect a severe economic downturn with the kind of large job losses typical of past recessions.”

During a november speech On labor markets, Bank of Canada Governor Tiff Macklem argued that the high level of job vacancies in Canada could provide a buffer to limit layoffs in the next recession.

However, central bank chiefs noted that young Canadians in particular are feeling the pressure of high inflation and rising borrowing rates.

“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 is certainly frustrating to face the uncertainty of inflation and the impact of higher interest rates at a time when you are just getting financially established: building your career, buying a house, raising a family.”

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