The recent increase in the Bank of Canada’s interest rate is likely to mean only modestly higher costs for variable-rate mortgage holders, with the psychological impact potentially outweighing the financial one. Marc Crossman, a mortgage broker with Tango Alberta in Edmonton, said the latest 25 basis point hike to 2.5 per cent will add about $14 more per month per $100,000 of mortgage. "The headline sounds a lot worse than the underlying numbers actually are," Crossman said. "The psychology of the interest rate is more important for borrowers than the practical impact." Variable rates remain significantly lower than fixed rates, sitting around 3.7 per cent compared to 4.7 per cent or higher for a five-year fixed mortgage.
While the rate hike's direct effect may be muted, a new report highlights growing financial stress in some of Canada's largest housing markets. The Residential Mortgage Industry Report from the Canada Mortgage and Housing Corp. reveals delinquency rates are rising in British Columbia and Ontario. "Ontario is one of the key regions to watch with delinquency rates," said Taylor Pardy, lead economist for the Prairies at CMHC. "It is approaching levels we haven't seen since 2008." At the end of June this year, Ontario's delinquency rate was 0.32 per cent of all mortgages, a 500 per cent rise from a low of 0.06 per cent in 2021.
In contrast, Alberta's delinquency rate has decreased to 0.27 per cent, down from a near-term peak of 0.52 per cent in 2020. Pardy attributed the improvement to stronger economic conditions in the province, which is less affected by trade tensions with the United States and continues to see population growth. "That's generally been supported by stronger economic conditions in Alberta," Pardy said. The 2020 peak reflected the impact of the energy sector downturn and the first few months of the pandemic, he noted.
Dan Eisner, chief executive officer of True North Mortgage in Calgary, said variable rate mortgages remain popular despite the rate hike. "It's still a very popular product," Eisner said. He noted that while the Bank of Canada may be on a tightening cycle, borrowers are unlikely to feel the dramatic pinch experienced in 2022 and 2023 when rates rose sharply. He pointed to a key difference between Alberta and Ontario markets. "The reason we're seeing the increase in Ontario for delinquency rates is not because interest rates have gone up, because if we had, we'd have seen arrears increase in Alberta, too," Eisner said. "The reason Ontario and B.C. are seeing the increases is because their property values have fallen."
Pardy said affordability challenges, economic uncertainty from the trade war and decreased international migration have created more stress in Canada's largest markets. The Greater Toronto Area has seen significant price declines amid lower demand, he added. By comparison, the Edmonton and Calgary markets remain more affordable, with homeowners having likely experienced price gains in recent years. This leaves Alberta homeowners with more ability to refinance if facing financial trouble, whereas many in Ontario have less equity.
Crossman said the central bank likely has more rate hikes coming, predicting a quarter point increase every couple of meetings for the next year given the near-term inflation outlook. He also noted that higher energy prices, while benefiting Alberta's economy, can have a negative impact in Edmonton by sparking higher costs for other goods and services. Despite rising delinquencies in Ontario and B.C., rates remain very low nationally. In Ontario, the 0.32 per cent delinquency rate is still a sliver of the overall mortgage market.