The central bank has engaged in an unprecedented campaign of rate jumps over the past year
The spate of interest rate hikes over the past year and the resulting increases in borrowing costs have led to greater financial vulnerabilities in Canadian households, according to new data from the Bank of Canada.
In Q4 2022 alone, 28.75% of new mortgage originations had debt service ratios greater than 25%, a share that was 12% higher compared to the same period in 2021, the central bank said.
“All else being equal, a household that spends a large portion of its income on mortgage payments may be more vulnerable to financial stress – it may be more likely to fall behind on debt payments if a negative income shock or a rise in mortgage interest rates were to occur,” the BoC said. “The bank uses the share of new mortgages with a mortgage DSR greater than 25% to identify the most vulnerable households.”
The same period also registered a drastic decline in the number of mortgage originations, with Q4 tallying 148,835 originations – significantly lower than the pandemic-era peak of 279,682 originations seen in Q1 2021.
At the same time, the share of indebted Canadian households that were behind on their repayments for at least 60 days spiked from 1.92% at the end of 2021 to 2.16% in Q4 2022.
“Because mortgages are typically the last product to go into arrears, missed payments on other types of debt can be early signs of financial distress,” the BoC said.
Royce Mendes, head of macro strategy at Desjardins Securities, said in a recent investor report that these increases in vulnerabilities are a key reason for the BoC’s rate freeze decision earlier this month.
“The question is whether the economy and inflation will cooperate soon enough to allow central bankers to remain on hold,” Mendes said.