Mortgage debt taking up a record share of income

  3/14/2023 |   SHARE
Posted in Mortgages and Real Estate by Francesco Basile| Back to Main Blog Page

Couple Managing Debt

Borrowers are now spending roughly $1 out of every $13 of their disposable income on servicing their mortgages.

That’s according to Statistics Canada’s fourth-quarter national balance sheet and financial flow accounts. The data shows Canadians are spending 7.66% of their household disposable income on servicing their mortgage debt, up from 7.5% in the previous quarter and 7.09% a year earlier. That’s a record high according to data going back to 1990.

Looking at total overall debt obligations, the average debt-to-service ratio rose to 14.33% in Q4, up from 13.72% a year earlier.

“While debt growth slowed and income increased, the debt-service ratio continued to edge higher and debt repayment slowed,” TD Economics’ Ksenia Bushmeneva observed in a research note. “Looking ahead, debt servicing costs are expected to continue to rise rapidly over the course of this year and peak later (in the second half of 2024).”

Canadian Mortgage Debt Service Ratio

The rise in debt servicing costs was kept in check thanks to slowing debt growth and a rise in income over the quarter, StatCan reported.

Household disposable income before interest payments rose by 3.8% in the quarter, which was outpaced by a 4.4% rise in debt payments.

“Additional upward pressure on debt payments remains, as those with variable-rate mortgages increase their payments as a result of hitting their trigger rate, and some fixed-rate mortgage holders near the end of their terms must then negotiate new lending agreements,” StatCan noted.

The agency also said that compared with the fourth quarter of 2021, payments of interest rose an “unprecedented” 45% in Q4 2022, while obligated payments of principal fell 7.0%.

Additional findings in StatCan’s data release

Statistics Canada’s latest quarterly national balance sheet and financial flow accounts provided a wealth of new mortgage data. The following are some of the highlights:

Household borrowing continued to slow

  • Credit market borrowers added $23.7 billion of debt in Q4, down from $33.7 billion in Q3. StatCan noted this is the slowest pace of borrowing growth since mid-2020.
  • “As households reacted to increased interest rates, mortgage demand slowed to $17.2 billion in the fourth quarter of 2022, the slowest pace since the beginning of 2019,” the report noted. “By comparison, households demanded $120.3 billion in mortgage debt over the first three quarters of 2022.”
  • Credit market borrowing in all of 2022 ($165.8 billion) was down 14.2% compared to 2021 ($193.1 billion), but was still above 2019 levels ($92.6 billion).

Variable mortgage rate popularity falling

  • “Variable-rate borrowing represented 24.3% of new funds advanced versus fixed rate alternatives in the fourth quarter, compared with 53.5% for variable rate borrowing in the fourth quarter of 2021,” StatCan said.
  • Of all mortgages outstanding, variable-rate mortgages represented just over one-third (33.7%) of total outstanding mortgage debt in Q4, down from 34.7% in Q3.

Home price declines slowing

  • The value of household residential real estate declined by 1.4% (-$104.1 billion) from Q3 to Q4. That follows two consecutive quarters of sharper declines that, “combined, shed nearly three-quarters of a trillion dollars from household real estate wealth,” StatCan noted.
  • “By the end of 2022, the total value of residential real estate in Canada was 6.8% lower than the start of the year, but 32.8% higher than the end of 2019.”

Source: Canadian Mortgage Trends

Canadian Debt, Canadian Households, Household Debt, Mortgage Debt