The Bank of Canada's Interest Rate Increases: Impact on Canadian Mortgage Holders

A recent survey commissioned by WealthRocket has unveiled a concerning statistic: if the Bank of Canada continues to raise interest rates, one-third of Canadian mortgage holders may find themselves in a tight spot, necessitating significant life changes. The survey, conducted online by Angus Reid in September and featuring responses from 1,504 Canadians, sheds light on the potential financial challenges ahead.

In the event of another rate hike, 35% of Canadian mortgage holders would be compelled to make consequential changes to their financial situation. These changes could range from taking on a second job, extending their mortgage amortization period, or even breaking their mortgage agreement. For some, renting out part of their home or selling it would become a necessary step.

The impact of higher interest rates is felt most profoundly in Ontario, where 37% of mortgage holders would face these decisions. Western Canada is relatively less affected, with 33% of mortgage holders in a similar predicament.

David O'Leary, a CFA charterholder and personal finance expert at WealthRocket, highlights the importance of being prepared for various scenarios. While it's natural to hope for interest rates to decrease, the timeline for such changes may not align with our expectations.

The Bank of Canada's upcoming interest rate decision on October 25 is generating anticipation. While economists predict that the Bank may pause rates at 5% due to economic indicators suggesting a slowdown and easing inflation, another rate hike remains a possibility if future data doesn't align with these expectations.

Beyond the immediate impact of interest rates, the survey also brings to light another concerning statistic: nearly one-third of mortgage holders allocate 40% or more of their gross monthly income to housing costs, exceeding the Canada Mortgage and Housing Corporation (CMHC) standard of 39%.

Ontario tops the list with 38% of Canadians exceeding the CMHC standard, highlighting the challenges faced by homeowners in this province. Younger Canadians, in the 18 to 34 age group, are more likely to spend a higher percentage of their income on housing, with 37% surpassing the standard, compared to 26% of those aged 55 and older.

Notably, younger homeowners often have less time to save, lower incomes, smaller down payments, and shorter mortgage repayment histories, contributing to their higher housing cost burdens.

For dual-income homeowners, 36% use one partner's entire income to cover monthly mortgage payments, while the other partner's income goes toward remaining housing expenses like utilities and condo fees. Additionally, 27% of respondents indicated that one partner's income covers all housing costs, including mortgage payments.

Among sole homeowners, 16% are able to cover all housing costs, including their mortgage payments, with their own income. However, 3% rely on credit to meet non-mortgage expenses.

The anxieties of mortgage holders are not limited to interest rates. A survey by Zolo revealed that one-fifth of homeowners constantly worry about their ability to afford their mortgage upon renewal, while a poll from Leger found that more than half of Canadians have had concerns about meeting their mortgage or rent payments over the past few months. These concerns underscore the importance of financial preparedness and sound mortgage management.