Borrowers who took on mortgages during the pandemic will be among the most affected
Approximately half of Canada’s current outstanding debt (including mortgages) will be affected by any increases in the Bank of Canada’s overnight rate, according to Benjamin Tal of CIBC.
With the average size of a new mortgage increasing by 20% during the pandemic to reach roughly $450,000, even just a 1% increase in mortgage rates from current levels will cost an average new buyer 12% ($230) more in additional monthly interest payments, Tal said.
“Assuming mortgage originations return to pre-pandemic levels, that translates into an additional $1.6 billion in annual interest payments relative to 2021 borrowers,” Tal said.
And while mortgage holders who took out their loans from 2017 to 2019 have “some immunity” against the impact of rate hikes, borrowers who acquired mortgages during the pandemic won’t be as fortunate, Tal said.
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“Given that in the past two years mortgage originations rose by more than 60% relative to their pre-crisis level, that might be a significant shock,” Tal said.
CIBC projected that roughly half of Canada’s $660 billion consumer loan portfolio will be repriced due to increases in the overnight rate.
“We estimate that a 100bps hike would lead to an increase of half a percent in interest payments as a share of disposable income,” Tal said. “The sizable lines of credit in the loan portfolio are fully exposed to any rate hikes, resulting in a direct impact on consumption. Furthermore, if rates stay elevated into 2025, the massive borrowing undertaken during the pandemic will feel the full bite of higher rates.”
