The Bank of Canada's recent Financial Stability Report highlights growing concerns for renters as interest rates rise. While acknowledging that most homeowners (around half according to the report) have managed increased borrowing costs so far, the report finds evidence of significant financial strain among renters.
Rising Interest Rates Affecting Renters
The report indicates a concerning rise in credit card delinquencies and high credit card balances for non-mortgage holders. Specifically, the report states the share of households without a mortgage that are behind on credit card and auto loan payments has returned to or surpassed typical levels, after reaching historic lows during the pandemic. Additionally, the report found that over the past year, the share of non-mortgage borrowers carrying a credit card balance of at least 80% of their limit has continued to climb.
Mortgage Renewals to Bring Bigger Burdens
The Bank of Canada expects a significant portion of mortgages (estimated at 45% of all outstanding mortgages) to renew in the next two and a half years. This will lead to substantially higher payments for homeowners, with the report predicting a median increase in monthly mortgage payments of more than 20% at renewal in 2025 and more than 30% in 2026, compared with origination. For variable-rate mortgages with fixed payments, the median increase is expected to be even higher, at over 60% in 2026.
Impact on Rental Market and Financial System
The report warns that these higher mortgage payments could put additional pressure on rental vacancy rates and potentially lead to rent hikes. Furthermore, the report acknowledges the potential for a larger financial shock if rising unemployment accompanies interest rate hikes. This could impact the stability of banks (particularly smaller lenders who have already seen a sharp uptick in credit arrears) and the overall financial system.
Building a Budget
In this environment, it's crucial for renters to be proactive in managing their finances. Here are some steps you can take:
- Create a Realistic Budget: Carefully assess your income and expenses to identify areas where you can cut back. Tools like Mint or YNAB can help you categorize your spending and identify areas for improvement.
- Explore Cost-Saving Strategies: Consider cheaper grocery options, reducing eating out, and seeking entertainment on a budget. Look for ways to save on utilities by sharing them with roommates or using energy-efficient appliances.
- Communicate with Your Landlord: If you're facing financial hardship, have an open conversation with your landlord. Explain your situation and explore potential solutions, such as a rent payment plan.
- Research Affordable Housing Options: Depending on your location, there may be government assistance programs or subsidized housing options available. Research these possibilities and apply if you qualify.
Staying informed about the housing market and exploring available resources
Source: BoC
