Monthly Mortgage Payments Could Spike 20-40% Over Next 3 Years: Bank of Canada

The Bank of Canada building in Ottawa in a file photo. (Sean Kilpatrick/The Canadian Press)

While a large number of mortgage holders have seen their monthly payment rates jump over the past year due to rising interest rates, the Bank of Canada (BoC) says the impact could become greater and more far-reaching over the next three years as average mortgage payment rates could spike by up to 40 percent.

The central bank released its annual Financial System Review on May 18, outlining its national economic expectations for the next several years across a number of areas—one of which was Canadian household debt.

The BoC said “financial stress” in the coming years “could increase existing financial vulnerabilities in Canada,” such as the ability of households to service their debt.

“Additional sharp increases to bank funding costs could result in higher lending rates,” it said. “This would add to the high debt-service burden many mortgage holders already face, leaving them more vulnerable to a decline in income.”

Variable-rate mortgage holders have faced the most interest rate increases since March 2022 as the central bank has hiked its key interest rate by 4.25 percentage points in that period in a bid to bring down high inflation rates.

However, since many variable-rate mortgage owners have fixed monthly payments, the added interest has increased the amount of time they'll need to pay off their mortgages. If these mortgage owners decide to stick with their original amortization periods when they renew their mortgages in the next several years, their monthly payments will increase significantly.

“By the end of 2026, nearly all mortgage holders will have seen their payments increase,” said the BoC. “Assuming mortgage rates evolve according to current market expectations, the median payment increase over the 2023–26 period will be about 20 percent.”

Mortgage Payments

The bank said that most fixed-rate mortgage owners will face renewal in the 2025–26 fiscal year, at which time they'll see an average monthly payment increase of between 20 and 25 percent.

Average monthly payment increases for variable-rate mortgage holders will depend on whether their monthly payments are set as variable or fixed at renewal, the bank said.

For those with variable payments, the bank said these borrowers “have already experienced an increase in payments of close to 50 percent, with the bulk of the increase taking place in 2022.”

It said those with fixed monthly payments “will need to increase their payments by approximately 40 percent to maintain their original amortization schedule, assuming a renewal in 2025 or 2026.”

“Nobody should expect that interest rates are going to go back down to the very low levels that we’ve seen over the last decade or so,” Governor Tiff Macklem said during a news conference on May 18.

“We’re in a transition period to a world where interest rates are going to be higher than what many people have gotten used to and that transition is going to take a while.”

The Canadian Press contributed to this report.