Another rate hike would force 35% of Canadian mortgage holders to make serious changes to their financial situation: survey

Homeownership has long been deemed a life milestone. Once you get a mortgage, the thinking goes, you’re on your way to building equity. And while owning a home is still an investment some can benefit from, the reality is that the cost of homeownership has become a burden to anyone who can’t keep up with today’s cost of living.

The Bank of Canada has raised its policy interest rate 10 times since March 2022, and many Canadians may be left house poor as a result — unable to invest for their future, something 3-in-10 Canadians are doing less of these days. The cost of living has even pushed some Canadians to leave the country, while the Government of Canada is warning new immigrants to prepare financially as they anticipate the price of settling here.

A new WealthRocket survey of 1,504 Canadians from the Angus Reid forum reveals that of the 45% of Canadians who own a home or condo with a mortgage, nearly 1-in-3 (31%) are putting more of their monthly gross income toward housing costs than is recommended by the Canada Mortgage and Housing Corporation (CMHC). Equally concerning, 35% say something significant about their financial situation would need to change if the Bank of Canada raises rates one more time within the next year — including needing a second job, extending their amortization, breaking their mortgage, or having to sell their home.

According to the CMHC, your gross debt service (GDS) ratio, or the percentage of your income that goes toward housing costs, should not exceed 39%.

While the majority of Canadians with mortgages are within that limit (69%), nearly 1-in-3 aren’t. The survey reveals that 31% of Canadian mortgage holders are spending 40% or more of their monthly gross income on housing.

When broken down by region, we see that the number of mortgage holders in Ontario who exceed the CMHC GDS ratio is higher than those in Western Canada and Quebec.

And when we look at self-reported GDS ratios by age, those 18 to 34 (37%) are more likely to exceed the CMHC standard than those ages 35-54 (30%) and 55+ (26%).

“Because they’re younger, their incomes are typically lower, they’ve had less time to save, and likely made a smaller down payment,” says David O’Leary, CFA charterholder and WealthRocket’s personal finance expert. “They’ve also had their mortgage for a shorter period and have had less time to pay it down. It’s no surprise that their housing costs eat up a greater percentage of their income.”

But when increased housing costs are combined with debt that Canadians already carry, it can be difficult for any age group to make ends meet. Within the last decade, Canada’s household debt-to-disposable-income rate rose from 150% in 2011 to 185% in the first quarter of 2023. This follows a 30-year increase from 1980 to 2011. Given this, a substantial percentage of Canadians are bound to be putting more of their gross monthly income toward housing than they should. 

On top of that, the number of new Canadian mortgages with a mortgage debt service ratio (DSR) — the portion of income that goes toward your mortgage payment only — of more than 25% is vastly different than it was roughly 10 years ago. In the first quarter of 2014, 13% of new mortgages had a DSR of more than 25%. That percentage has fluctuated over the years, but since the first quarter of 2022, it’s been on a steep incline, reaching 29% in the second quarter of 2023.

The start of this incline is precisely when the Bank of Canada commenced its latest series of rate hikes, in March 2022. Since then, Canadian homeowners have learned to deal with higher mortgage payments in different ways. 

It’s no surprise that many Canadians are facing higher mortgage payments and having to make adjustments to how they cover housing costs. And while there are myriad ways to do this, particularly for dual-income partners, the survey response options aim to capture a broad batch of potential arrangements.

For 36% of Canadian mortgage holders, one partner’s income is eaten up by the mortgage payment, while the other person’s income covers all of the remaining housing costs, like utilities, property tax, or condo fees. For slightly more than one-quarter (27%) of respondents, one partner’s monthly income covers all of the housing costs, including the mortgage.

Meanwhile, 4% rent out all or a portion of the home to cover part or all of the housing costs, including the mortgage. 

For sole homeowners, 16% say most of their income covers their mortgage, while the rest covers other housing expenses. And 3% say they use credit to supplement housing expenses outside of the mortgage. 

“Ideally you don’t want to be doing that if you can avoid it,” says O’Leary. “It can be reasonable to the extent that it’s a very short-term solution where you have a clear line of sight on when you’ll receive the income to pay it back.” 

For example, he says, it can be a method of bridging a cash flow problem. Maybe you encountered some unexpected expenses during the month but will have more than enough to offset your cash shortfall once you receive your next paycheque. But using credit for anything other than offsetting a temporary cash shortfall creates a dangerous cycle. 

Regardless of how Canadians are covering homeownership costs as a household, it’s clear that a substantial number are barely getting by. Recent data show that nearly half of Canadians are living paycheque to paycheque, while 55% of Canadians are worried about making their monthly mortgage or rent payments. Part of this can be attributed to the rise of home prices in relation to income.

According to the CMHC, the average scheduled monthly mortgage payment for new loans in Canada was $1,922 by the end of the second quarter of 2023. In cities like Toronto, that number increases to $2,891. If you’re making the median Toronto salary of $84,000 (as of 2021), this monthly payment also exceeds the CMHC’s recommended GDS ratio of 39% 一 without even factoring in other housing costs. 

This discrepancy is what leaves many Canadians on the brink of financial intervention when it comes to homeownership.

The Bank of Canada is set to make its next interest rate decision on October 25, with many news outlets reporting that the case for a rate hold is strong, given a surprise drop in inflation in September, to 3.8%.

That would be welcome news for 35% of Canadian mortgage holders, who say one more interest rate hike from the Bank of Canada — either this year or in 2024 — would necessitate a significant change to their current situation. That might include altering their mortgage agreement, living arrangement, employment, or lifestyle. 

According to the survey, if the BoC makes another rate hike:

• 17% would have to get an additional job to continue making mortgage payments
• 16% would have to extend their amortization to lower their mortgage payment — something many Canadians have already done, and experts caution against
• 9% would have to sell their home
• 7% would have to break their mortgage (e.g. switch from variable to fixed) to get a lower interest rate
• 4% would have to rent out all or a portion of their home to make ends meet

Conversely, 65% of mortgage holders say nothing about their current situation would need to change if another rate hike occurred. 

“I wonder what percentage of those who say nothing would have to change, maybe aren’t willing to acknowledge the cold reality that things have to change,” says O’Leary. “Most of us will know somebody who had to sell their home and downsize, or start renting because they couldn’t afford it any longer. But many people facing this situation will be reluctant to admit it until they have no choice. I think that’s still the stage we’re at.”

Below is a regional breakdown of the percentage of mortgage holders who would need to make a significant change to their current situation if the BoC raises rates again.

The need for additional employment appears to be a growing necessity. The number of Canadians with more than one job has surpassed the pre-pandemic benchmark, which could be a result of the rise in the cost of living that’s occurred since then.

Even Canadians in less dire situations, like needing to break a variable-rate mortgage, would still have to bear the burden of refinancing. This process involves a prepayment fee equal to three months’ interest and potentially requalifying for the mortgage stress test with a different lender.

Regardless of what financial adjustment might be coming your way, the best thing you can do is be proactive.

“Asking your bank or lender ‘what would my mortgage payment be if interest rates go up further?’ will give you a good idea of what you can afford,” says O’Leary. “You have to set some sort of threshold.”

For example, pinning down the maximum payment increase you could take on within a certain time frame can help you address your financial tolerance and avoid real financial consequences. However, if you’re already at or near your ceiling, it’s best not to hold out for any particular outcome, since rate decisions are unpredictable.

“People are likely to have wishful thinking that interest rates will come down, and that they just need to keep waiting it out,” says O’Leary. “That may happen, but it also may not happen nearly fast enough.”