Bank of Canada Reports 3% Decrease in Disposable Income due to Interest Rate Hikes
Interest rate hikes have reduced mortgage holders’ average disposable income by about three percent as of 2024, a number that is expected to reach nearly five percent by 2027, according to a recent Bank of Canada report.
The authors noted that by April 2024, monthly mortgage payments had increased by about nine percent since 2022. They are expected to increase by 17 percent by 2027. It all leaves less disposable income in the hands of Canadian homeowners, the authors wrote.
“These increases in mortgage payments have caused declines in average disposable income—that is, household income net of mortgage payments—of 3 percent by April 2024 since 2022 and will likely cause a decline up to 5 percent by 2027.”
The report said that when interest rates increase, mortgages are renewed at higher rates, meaning less money is paid on the principal of the debt.
“Therefore, the average mortgage borrower in January 2028—when the market expects the gap between these two interest rate paths to have already closed—will face a remaining balance that is 2.8 percent higher than they expected in February 2022,” it said.
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Report authors said that mortgage borrowers’ income is hit twice during rate hike cycles, first by having mortgage payments increase during the cycle and then by having to pay a higher remaining balance in the future.
“Because a rate hike cycle will increase the total debt burden of mortgage borrowers, the negative effects of a rate hike cycle on mortgage borrowers’ consumption will last longer than the rate cycle itself.
Homeownership Stress
Over 60 percent of homeowners in Canada are feeling the financial pinch, according to a recent survey.
The majority of those surveyed, 77 percent, had a fixed rate on their mortgage. Forty-three percent said their mortgage was up for renewal in the next couple of years.
The Bank of Canada cut the interest rate for the first time in four years on June 5, by a quarter of a percent, lowering it to 4.75 percent.
The Canadian Press contributed to this article.
