Homeowners fare better due to increased equity
Rising interest rates are hitting renters harder than homeowners, according to the Bank of Canada's latest Financial Stability Report.
While the overall level of financial stress is easing back towards pre-pandemic norms, the report reveals that the burden is falling disproportionately on those without mortgages.
“Renters are experiencing the biggest increase in financial stress,” the report read. “After hitting historical lows during the pandemic, the share of households without a mortgage that are behind on credit card and auto loan payments has come back up to—or surpassed—typical levels.”
The BoC said the share of renters who carry a credit card balance of at least 80% of their credit limit has continued to climb over the past year.
Meanwhile, indicators of financial stress among mortgage holders have remained relatively low even as many have been coping with higher mortgage payments.
The Bank offered several explanations for the disparity.
Since the pandemic, the surge in home prices has provided homeowners with a substantial increase in home equity – a financial buffer that many renters simply don't have. This allows homeowners flexibility in managing higher mortgage payments if needed.
“Since the bank began raising its policy rate in March 2022, payments have increased for roughly half of all outstanding mortgages,” the central bank wrote. “Over the next two and a half years, most of the remaining mortgages will renew, and these borrowers will likely face relatively larger payment increases.
Read more: Housing crisis deepens as first-time buyers struggle
“At the same time, many mortgage holders have also seen their wages go up. Some have proactively adjusted their spending to help offset higher debt payments. Many also report higher levels of savings available to offset increased payments.”
Meanwhile, Governor Tiff Macklem explained that renters tend to be more vulnerable during high inflation and interest rates. They're facing a double whammy – rising rents alongside higher costs for everyday essentials like groceries and transportation. Renters typically have lower incomes and fewer financial reserves to fall back on.
“Overall, the evidence suggests that households have the flexibility to continue servicing their debt at higher rates,” the BoC said. “We’ll also be watching how the labour market evolves, since the biggest factor that determines whether someone can service their debt is if they have a stable income.”
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