Mortgage holders adjust spending amidst higher interest rates

TD Economics report shines light on borrower behaviour in turbulent environment

Mortgage holders adjust spending amidst higher interest rates

Mortgage holders have begun to adjust their spending behaviour as higher interest rates continue to plague the economy, according to a report by TD Economics.

“High household debt is the biggest vulnerability of the Canadian economy. As more homeowners reset their mortgages at higher rates, less disposable income is available to maintain consumer spending,” said James Orlando, CFA, director & senior economist.

The report found that people who did not have a mortgage, which took up the majority of Canadian households, have increased their spending patterns over the past year, noting that employment gains and rising wages have been enough to support the increases in consumer spending.

The spending behaviour of mortgage holders also appeared to be vary depending on when they reset their mortgages. Those that reset in 2021 have notably pulled back on spending but not as much as those who reset in 2022. Those who reset in 2023 have pulled back the most.

Those who will reset in 2024 seemed to have pulled back on spending over the last year as a precaution since they are anticipating payment shocks.

“When the 2024 cohort goes through their reset next year, we’d expect to see them trim spending to a greater degree than they already have, putting further downward pressure on overall consumer spending,” said Orlando.

By the end of the next year, 65% of mortgages will have renewed as the Bank of Canada has said that 47% of all mortgages will have renewed at higher rates by the end of the year. With the 2024 cohort set to renew their mortgage with rates that are 200 basis points higher than what they are paying now, they were likely to experience payment shocks just as those who reset this year.

“In this case, total spending within the economy would be pulled down by an additional 0.5 percentage points. This is a contributing factor to why our forecast for consumption growth will go from +1.6% for 2023 (Q4 vs Q4) to just +0.6% in 2024,” said Orlando.

“While it does not look like this mortgage reset will be enough to tip the economy into recession, the Canadian consumer is becoming increasingly stressed by high interest rates,” he added.

The report used internal TD credit card and mortgage data to analyze the data between consumers with mortgages and those without them.