Stressed home owners in Canada extend loans, turn to credit cards

Ottawa – The Bank of Canada is growing more concerned about the ability of households to handle their debt in a higher interest rate environment, with more home owners relying on credit cards to meet expenses in the face of steeper mortgage payments.

Early signs of financial stress for households are emerging and many of them now have less financial flexibility, the central bank said in its annual review of the financial system published on Thursday. Recent homebuyers are extending their loans to make payments more manageable: The share of new mortgages with an amortisation period longer than 25 years rose to 46 per cent from 41 per cent over the last year.

The share of new mortgages with a debt service ratio of more than 25 per cent – that is, where the payments consume more than a quarter of the borrower’s income – more than doubled during 2022 to 29 per cent.

A longer amortisation period increases a household’s vulnerability as home equity is built more slowly, while a higher debt service ratio reduces flexibility for borrowers who experience unforeseen increases in expenses or losses in income. Home prices have fallen about 14 per cent since early 2022.

The heightened concern about households increases pressure on Bank of Canada policymakers as they try to tame inflation without tipping the economy into a severe recession. With Canadian households among the world’s most indebted, many economists expect the economy to respond faster and be more sensitive to higher rates than peers.

The Bank of Canada will next set rates on June 7. The majority of economists in a Bloomberg survey expect it to keep borrowing costs steady at 4.5 per cent for a third straight meeting, despite an unexpected acceleration in headline inflation to 4.4 per cent and a tight labour market that continues to churn out jobs.

The share of indebted households that are behind on any credit payments for at least 60 days has been increasing since the middle of 2022. As more homebuyers became more reliant on credit card debt over the past year, the proportion of them carrying an outstanding balance has exceeded pre-pandemic peaks.

Households that took on a mortgage between 2020 and 2022 are carrying about 17 per cent more credit card debt on average than those that purchased between 2017 and 2019. Arrears on credit cards have also been rising and are close to pre-pandemic levels.

About one-third of mortgages have seen an increase in payments compared with February 2022, before the bank started its tightening campaign, which has boosted rates by 425 basis points. By the end of 2026, nearly all mortgage holders will have seen their payments increase, the central bank said. If mortgage rates evolve in line with current market expectations, the median payment increase over the 2023-2026 period will be about 20 per cent, the bank said. BLOOMBERG