Canada’s Rising Mortgage Rates Is Bad News For Borrowers, But Not The Economy: NBF

Canadian mortgage rates are rising and it’s squeezing the country’s highly indebted households. National Bank of Canada (NBF) warns mortgage borrowers will see more income go to debt servicing soon. However, the share of income mortgage borrowers will divert to debt servicing isn’t much at the national level. Most Canadians don’t have a mortgage, and already own their home. By itself, rising rates and household debt isn’t expected to be the trigger for a recession.

Canadian Mortgage Borrowers To See Up To 6% More Income Lost To Rising Interest Rates

Canada’s highly indebted households are (mostly?) going to be fine, but it’ll cost them a lot more. The bank estimates those who borrowed at 4.5x gross annual income can see their payments rise between $187 and $281 per month. That would absorb between 2.6% to 6.0% of their net disposable income. Not as bad as the current rate of inflation, and borrowers were stress tested for that. However, it’s still going to be a diversion of income from regular consumption.

It’s A Minimal Amount of Lost Income At The National Level

Canadians are highly indebted but that debt is largely concentrated in higher income households. Zoom out and the bank estimates it will only result in a loss of 0.65% disposable income at the national level over the next 3 years. “The amount is significant but manageable in that it alone will not suffice to pull the economy into a recession,” wrote Matthieu Arseneau, NBF’s deputy chief economist.

Seems kind of low? Despite Canada’s astronomical mortgage debt, the vast majority of households have none. NBF estimates just 35% of households have mortgages and will have to deal with rising rates. All households have to deal with rising inflation if it’s not tackled though.

Rising Mortgages Costs Aren’t Enough To Cause A Recession

The bank emphasized while it’s a substantial loss of income to debt servicing, it’s not enough by itself to cause a recession. That doesn’t mean a recession isn’t coming, just higher rates alone aren’t enough to trigger it.

Combined with a negative wealth effect it can be a bigger issue. A wealth effect is when people spend because their assets increase in value and they feel wealthier. A negative wealth effect is the opposite, where people pull back on spending after seeing a drop in their asset values. With equities and home prices potentially correcting, a recession is still a very real possibility, warns the bank.

Though it won’t just be due to higher mortgage payments, so there’s that.

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