The Bank of Canada has expressed concern regarding households’ ability to withstand the impact of rising borrowing costs, as an increasing number of individuals rely on credit cards to manage their debt burdens. In its annual Financial System Review, released recently, the central bank acknowledged that most Canadian homeowners appear to be coping with higher interest rates. However, it highlighted the emergence of “pockets of strain,” particularly among those who purchased homes during the COVID-19 pandemic.

According to the Bank, households that obtained mortgages between 2020 and 2022 carry an average of approximately 17% more credit card debt compared to those who purchased between 2017 and 2019. Additionally, the proportion of indebted households experiencing payment delinquencies across various credit categories for a minimum of 60 days has been growing since the middle of the previous year.

The Bank further stated that by 2026, nearly all mortgages will witness an increase in payments, with the median payment expected to rise by approximately 20% over the next few years. Already, about one-third of mortgages have experienced payment increases as of February 2022.

While the Bank believes that most households will be able to manage these impending payment spikes, thanks to stress tests imposed on federally regulated financial institutions, it cautions that certain households may face challenges. These challenges could arise due to higher debt service ratios (DSRs), reduced home equity, and extended amortization periods, which limit household flexibility in the face of additional financial stress, such as reduced income.

Although several financial institutions have introduced relief measures for Canadians struggling with their payments, the Bank emphasizes that some households may find it difficult to navigate the combination of higher DSRs, lower home equity, and longer amortization periods, potentially limiting their flexibility during times of financial hardship.