Yahoo Finance Indebted households just starting to feel impact of higher rates: TD
The Bank of Canada might be nearing the end of its interest rate hiking cycle but indebted Canadian households are just starting to feel the impact of higher borrowing costs, a new TD Economics report says.
"While interest rates have been rising since the start of this year, the impact on households' bottom lines has only just begun. Debt service costs rise with a lag as mortgages and loan payments are renewed at current market rates," said the report, which was released on Monday.
TD expects the national debt service ratio to hit a record high in the first quarter of next year, driven entirely by higher interest payments.
The Bank of Canada has aggressively hiked its key lending rate, which underpins a variety of loans including some mortgages and auto loans, by 400 basis points since March to 4.25 per cent. TD expects another quarter-point hike at the central bank's January meeting.
Data from TD and Statistics Canada show the debt service ratio, or the amount of disposable income needed to service debt payments, was 13.3 per cent at the beginning of 2022. TD expects this will rise to above 16 per cent next year, surpassing the previous pre-pandemic record.
"With debt payments eating up more income, households will have to reduce savings or curb spending elsewhere, weighing on Canadian economic growth. We anticipate both over the course of 2023, with spending growth stalling and the personal saving rate drifting lower," the report said.
The impact of higher interest rates is also already playing out in the housing market as sales activity, and in turn prices, take a hit.
The latest Teranet-National Bank Home Price Index showed home prices declined in all the markets it tracks in November year-over-year. It's the first time this has happened since the 2008 financial crisis.
Higher borrowing costs will continue to hammer the mortgage market as many households look to renew or refinance at a higher rate in the near term.
TD says since the start of the pandemic, when rates were ultra low, the share of variable-rate mortgage originations rose six per cent to 56 per cent in the first quarter of this year. During the height of the pandemic, the Bank of Canada had told Canadians to expect interest rates to stay at historically low levels for a few years.
"Faced with higher borrowing costs, some households that are not at their maximum amortization of 30 years may choose to extend the length of their loans," the report said.
"For variable rate mortgage holders with fixed rate payments, amortization will increase automatically, though only up to a point. Once borrowers hit rates at which they are no longer covering any principal, they may have to raise their payments."
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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