Homeowners Cutting Back on Spending, Plan to Look for Second Job: Bank of Canada Survey

A person walks by a row of houses in Toronto on July 12, 2022. Cole Burston/The Canadian Press

Homeowners with variable-rate mortgages are cutting back on household spending and planning to look for a second job, according to a survey by the Bank of Canada (BoC).

The central bank said on June 30 that higher interest rates have weighed heavily on the finances of Canadians, with the impact “more acute” for homeowners with variable-rate mortgages, according to Blacklock’s Reporter.

“Interest rates on our variable-rate mortgage went from 2.6 percent to 6 percent,” said one respondent, cited in the bank’s report, titled “Canadian Survey of Consumer Expectations—Second Quarter of 2023.”

“This is a huge increase. We are not able to go out to restaurants anymore or go on vacations because we need to be able to pay for our mortgage.”

Nine interest rate hikes by the BoC have seen the rate surge from 0.25 percent in December 2021 to 4.75 percent this past June, making variable-rate mortgages more expensive.

Conducted between May 8 and May 15, the survey indicated that while most mortgage holders were confident they could still make the higher payments, “they are also more likely than other people to be looking for new or additional work.”

Respondents were asked if they were planning to increase their incomes—excluding a push for higher wages—in light of their expectations for inflation or deflation.

A comparison between holders of variable-rate and fixed-rate mortgages showed the former (31.56 percent) are more inclined to moonlight in second jobs than the latter (21.11 percent).

“At the same time, [most mortgage holders] are acting to lessen the impacts of renewal—most are cutting spending and repaying their principal more quickly,” said the report.

“Consumers still express a lot of uncertainty around economic growth in Canada,” it added. “Half of those surveyed expect a recession in the next 12 months.”

‘Fragility’

The BoC report followed a May 10 warning by Canada’s chief bank inspector who said he was concerned with the difficulties facing some homeowners.

“What I’m concerned about is the buildup in variable-rate mortgages with fixed payments,” said Superintendent of Financial Institutions Peter Routledge when he appeared before the Senate banking committee on May 10.

“During 2021 and 2022, there was a sizable increase in household mortgages underwritten with that product.”

Routledge said variable-rate mortgages with fixed payments are a “fragility” in the Canadian housing system. The loans typically amortized over 25 years represent a growing risk as payments are rescheduled, he explained.

“As rates increased, those payments remained fixed, but the interest charges against the mortgage increased,” he told senators. “Some of those mortgages’ amortization periods, just by the math of the product, have extended.”

He warned that the “fragility” won’t be felt by borrowers immediately, but will in a couple of years.

“If you happen to have that mortgage, and your mortgage payment is $2,200 per month, you’re still paying that amount per month, you’re probably not knocking down your principal at that stage, but you’re not experiencing payment shock,” he said.

“The risk is in about three to four years when all of those payments will have to be rescheduled according to the original amortization table, unless the bank and the household agree to a different underwriting.”

Statistics Canada in its “Monthly Credit Aggregates” update in May reported that mortgage debt nationwide totalled $2.1 trillion in March. Of that, some $307 billion is held in variable rate mortgages, by Manulife estimates, with a total of $246 billion carrying fixed payments, according to Blacklock’s findings.