The mortgage market is feeling the heat

The pain of rising interest rates is starting to spread across the housing market, and more people may soon find themselves facing larger monthly mortgage payments.

Driving the news: The Bank of Canada (BoC) estimates half of variable rate mortgages have hit their trigger rate, which will raise monthly payments for 13% of all mortgage holders. 

  • Variable mortgages make up about one-third of total mortgage debt in Canada, and 75% of those have fixed payments. When rates rise, fixed payments allocate more towards interest (instead of the principal) instead of raising the total amount.
  • But if interest rates increase a lot (which they have), borrowers eventually hit a “trigger rate,” meaning 100% of the payment is going towards only interest and lenders can force borrowers to make additional payments.

Why it matters: Mounting mortgage payments paired with increasing consumer debt could have a seismic impact on the economy, especially if the government’s predicted “mild” recession starts feeling a bit spicy and triggers a jump in the unemployment rate.   

  • If layoffs persist, affected homeowners will likely have a harder time keeping up with rising interest rates, which the Bank of Canada has confirmed will continue. 
  • Plus, a wave of homeowners that are forced to sell could flood the market with new listings and then prices would really start to drop.

Yes, but: The BoC’s No. 2 official, Senior Deputy Governor Carolyn Rogers, explained in a recent speech that Canada’s stringent mortgage stress test ensures “Canadians could continue to afford their homes when interest rates rose.”

Zoom out: Renters may start feeling the effects down the line, too. As landlords find their rental assets turning into liabilities, they could be compelled to raise rents—a phenomenon already picking up speed in the country’s biggest cities.