Canadians are well positioned to withstand interest rate storms

​As originally published in the Toronto Star

If you hold a mortgage, there’s a good chance you’ll see your payments rise over the next three years, if you haven’t experienced a bump already.

If you have a variable-rate mortgage with fixed payments, you could be looking at a 40 per cent hike when you renew your loan.

If it’s fixed-rate mortgage, you’re potentially facing a 20 to 25 per cent jump in the next three years. That’s from the Bank of Canada’s most recent financial system review in May — and before it raised its benchmark interest rate by 25 basis points to 4.75 per cent on June 7, and then a further 25 basis points to 5 per cent on July 12.

Now, after back-to-back interest rate hikes, many Canadians are monitoring the potential impact of reaching the “trigger rate” on Canadian variable rate mortgages (the point where the interest cost exceeds the monthly payment) and the ramifications — if any — on Canada’s housing market in the years to come.

While economists have been warning about this risk and its potential impact for years — and more recently as rates have increased — there are reasons to remain cautiously optimistic, thanks to the solid foundations the Canadian housing finance system is built on.

When it comes to managing risks in the housing market, it’s important to differentiate between idiosyncratic and systemic risks. The former pertains to individual, random, risks to the housing system day in, day out. They happen for a variety of reasons but are difficult to diversify due to their very individual nature.

The latter are driven by broader market movement, such as those described by economists when they refer to mortgage rates increases and their impact on variable and fixed rate mortgages holders. They are broader and, to some extent, collective in nature since they are likely to impact a larger number of Canadians at once. Fortunately, the Canadian housing finance system is built around mitigating those systemic risks.

A little-known fact is that there are built-in mitigations that help mortgage holders and financial institutions mitigate the systemic risks they could face. This includes tools that help mortgage holders:

• Re-amortize mortgages over a longer period (even longer than the typical 25 years) to reduce monthly payments.
• Defer mortgage payments for a short period of time.
• A missed-out payment over the total repayment period.
• Convert a variable mortgage to a fixed rate in order to protect against further rate hikes.

In the 2023 federal budget, the Government of Canada recognized these measures would benefit from a broader awareness and it committed to highlighting those relief measures by publishing guidelines to protect Canadian mortgage holders who are facing exceptional circumstances.

Canada Mortgage and Housing Corporation (CMHC), the federally-owned mortgage insurer, also has several tools to help the housing finance system navigate challenging times. In 2008-2009, the CMHC intervened to ensure liquidity was available to mortgage lenders to weather the U.S. subprime crisis. After that situation was dealt with, CMHC reduced its exposure to the Canadian mortgage market to allow private sector insurers to take a more prominent role, but with CMHC keeping a healthy market share.

If need be, the CMHC may still act to stabilize our domestic housing finance system and, in doing so, benefit from the Federal government’s backing (and its advantageous AAA debt rating) to help the market face volatility in this era of higher mortgage rates.

Next summer will be an important milestone for the Canadian housing market, as we head into the period where the bulk of interest rates increases from last year start to be felt. The sharpest increases in rates occurred in the summer of 2022, and it typically takes up to a year for the economy to feel their full impact.

Nevertheless, Canadians are in a good position to manage their personal finances and exposure to the housing market: the Canadian labour market remains steady, meaning Canadians have the possibility to make trade-offs between discretionary and nondiscretionary spending. And inflation is keeping to its moderating trend, recently dipping below three per cent.

With recent housing data pointing to growth across the country — the Canadian Real Estate Association’s latest report shows home sales jumped 5.1 per cent month-over-month in May — Canada is not at a point where the tools listed above need to be used broadly.

But should a storm head our way, the Canadian housing finance system is equipped to weather it.

Mathieu Laberge, partner and leader, economics & policy, KPMG Canada and advised on the development of the National Housing Strategy and is a former chief economist at CMHC.