Canada’s renters are showing more signs of financial stress amid rising debt costs than homeowners facing higher mortgage rates, according to a new analysis from the central bank.
The Bank of Canada released its Financial Stability Report for 2024 on Thursday.
Overall, the central bank said that signs of financial stress were rising back to normal levels after “sharp declines” during the COVID-19 pandemic.
But these signs of stress are most concentrated among Canadians who don’t have a mortgage, particularly renters.
Why are renters struggling?
People without a mortgage are falling behind more on credit card and auto loans payments, the Bank of Canada said. Rates of arrears in this category are close to pre-pandemic levels and continuing to grow for non-mortgage holders, according to the report.
But those rates remain low and stable for Canadians with a mortgage. The Bank of Canada says that despite rising interest rates over the past two years, which feed into mortgage rates for homeowners, these households are handling the higher debt burden with little indication of stress.
The central bank noted that the rise in home prices since the start of the pandemic led to more equity for most homeowners. That can act as a “financial buffer” for these borrowers to reduce their payments, the report said.
Bank of Canada governor Tiff Macklem told reporters Thursday that, on the other hand, it’s typical for renters to be more “vulnerable” during times of high inflation and the associated rate tightening cycles.
Though annual rates of inflation have cooled significantly since their peak nearly two years ago, renters today are still coping with the pressure from rising rental payments and the cumulative impacts of higher costs at the grocery store and at the gas pumps, for example.
These necessities usually make up a bigger proportion of the overall basket of expenses for a renter compared to a homeowner, Macklem noted. Renters typically have a lower income and don’t have the same financial buffers that homeowners do, he added.
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Macklem said that while renters are feeling stressed by elevated interest rates when it comes to auto loans and credit card debt, he argued these higher borrowing costs were not solely responsible for their financial stress.
“Yes, interest rates are a factor, but they’re certainly not the only one,” he said.
Income growth, increased savings and a pullback in discretionary spending is also helping many households offset the pressure from higher interest rates, according to the report.
More mortgage rate shocks in the cards
The Bank of Canada also warned, however, that those renewing their mortgages in the coming years are expected to see bigger jumps in their monthly payments than those who renewed since the start of the rate hike cycle.
The Bank of Canada expects a median percentage increase of 31.9 per cent in monthly payments for all mortgages renewing in 2026. That’s lower for most fixed mortgage products but the average variable rate mortgage with static payments could see costs balloon by more than 60 per cent at renewal, the central bank warned.
About half of mortgages at big Canadian banks have yet to be renewed in the higher interest rate environment, according to the report.
While the Bank of Canada indicates that Canadians are coping well overall with the higher costs of debt, senior deputy governor Carolyn Rogers told reporters that doesn’t mean households aren’t struggling.
In order to meet the demand of rising debt payments, Canadians are cutting back elsewhere on their consumption where possible, she said.
The central bank’s confidence in the stability of the financial system should not be mistaken as a sign that households and individuals are not feeling “very real stress,” Rogers said.
“We can’t stress enough that there is a difference between looking at the overall system stability and acknowledging what is real stress in households and individuals,” she said. “Even if households are adjusting well does not mean that it’s been easy.”
While the Bank of Canada’s report points to little signs of stress on major Canadian lenders in the face of higher interest rates, the central bank warns that a looming economic downturn could intensify risks to the financial system tied to high borrowing rates.
“Higher debt-servicing costs reduce financial flexibility for households and businesses and make them more vulnerable in the event of an economic downturn,” the report read.
Macklem said that, compared to the last time the Bank of Canada released its financial system check-in a year ago, conditions both domestically and internationally have largely improved. The risk of recession is diminished now, he said, and the global banking system has proven resilient after the collapse of Silicon Valley Bank and other institutions last year were spurring structural concerns.
The Bank of Canada now points to debt serviceability from both households and businesses amid higher interest rates, as well as the possibility of rapid valuation shifts in financial assets, as risks to the financial system.
The central bank also warned that some portfolio managers’ valuations in the commercial real estate sector, where offices are currently facing high vacancy rates, may still need to be revised.
A shock to one area of the financial system has a danger of spilling over into others, the Bank of Canada warned. The central bank called on lenders, businesses and households to be “proactive” in guarding themselves against such risks by keeping an accessible reserve of funds and preparing for rising debt costs.
What does this mean for interest rates?
The Bank of Canada’s financial stability report comes less than a month before its next interest rate decision on June 5, where many analysts and Macklem himself have suggested a rate cut might be on the table amid easing in inflation and a slowdown in the economy.
Some analysts argue the higher interest rates could pose a risk to the financial system if left unchanged for too long.
“While the Canadian financial system remains resilient for the time being, we believe central bankers will need to begin lowering rates soon to keep things that way,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note Thursday.
After the report was released, money markets saw a roughly 62 per cent chance of a cut in June compared to 60 per cent earlier, according to Reuters, while a reduction in July is fully priced in.
Macklem said in an appearance at the House of Commons finance committee last week that the central bank was getting closer to being able to start cutting rates but has so far declined to give a timetable.
“(Higher rates) will continue to restrain household spending and that is something that obviously we’re taking into account as we think about what interest rates need to be,” he told reporters on Thursday.
– with files from Reuters
