Mortgage financing costs in Canada are rising, substantiating concerns about diverted disposable income. Equifax data from CMHC shows that the average monthly mortgage payment increased in the second quarter of 2022. Rising interest rates accounted for most of the increase in the previous quarter. However, growth was only slightly faster than the sluggish price growth a year earlier. The big difference? Experts believe that rising interest rates actually improve affordability in the coming months.
The average monthly mortgage payment in Canada is $61 higher than last year
In Canada, the average mortgage payment is accelerating, but not by much. Monthly commitments rose to $1,458 per month in Q2 2022, an increase of 4.5% (+$61) over last year. The increase is probably not the crushing amount that people and the media are touting. Especially compared to the growth rate a year earlier.
Average monthly mortgage payment in Canada
The average monthly mortgage payment for a Canadian household in Q2 of each respective year.
Source: Equifax; CMHC; Better housing.
Mortgage payments this year may be due to interest rates, but low interest rates also drove spending last year. In the second quarter of 2021, the annual average monthly payment growth was 4.2% (+$55) per month. Interest rates fell to near zero, average mortgage payments jumped because of prices. Growth this year is just 0.3 points, or $6 per month, faster than last year. In this inflationary environment, reallocated disposable income may not raise a brow at the aggregate level.
Growth in average monthly mortgage payments in Canada
Annual growth in the average monthly mortgage payment for a Canadian household in Q2 of each respective year.
Source: Equifax; CMHC; Better housing.
Toronto has seen slow growth in payments over the past year
Toronto real estate sees average mortgage payment growth slow. Monthly payments reached $1,987 in Q2 2022, up 5.4% (+$102) from last year. Last year it rose 5.7% (+$101), even more than this year’s climb. Both years are unusually high growth and problematic, don’t read that wrong. However, higher rates appear to slow growth compared to decreasing them.
The average mortgage payment in Vancouver increased by $97 per month
Vancouver real estate saw growth pick up slightly from higher rates. The average monthly payment rose to $2,089 in Q2 2022, up 4.9% (+$97) from last year. In the second quarter of 2021, annual growth was at a slightly slower pace of 4.8% (+$92). Once again, this is a huge and unusually large increase for both years. Rising interest rates and fresh-off-record prices led to nearly the same growth as low rates last year.
Rising costs are not as important as the speed and rate of growth in payments. Many people will still renew at higher prices if they bought at a record low price. This will divert more disposable income from the economy to service the debt. However, if it happens over time, it’s much less of a concern than a sudden spike. The longer it takes to renew, the more principal will be paid off, leaving smaller balances. There are also tools like amortization extensions if the payments are too much for the homeowner.
Concerns about rising rates siphoning disposable income from the economy are valid. However, the excess demand caused by low interest rates was driving prices higher and creating the same problem. Today’s rising interest rates are primarily a cause for concern because low interest rates have led to such high prices. This is expected to underline the rise in interest rates in the short term.
The difference is that this time there is not expected to be any long-term erosion of affordability. This week the National Bank warned of the biggest erosion of affordability in 4 decades. This is mainly due to rising financing costs. They don’t expect that to continue as home sales have returned to normal levels since 2019. The Big Six bank predicts prices will fall to improve affordability soon.
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