Edmonton might be one of Canada’s most affordable markets, but the rise of interest rates could have a significant impact on the city’s mortgage holders, who represent about 65 per cent of all homeowners.
In February, Statistics Canada reported that one in four Canadians don’t believe they would be able to afford an unexpected expense of $500. As homeowners renew their mortgages this year, such an expense is around the corner.
Before March ends, the monthly expenses of Danielle Paradise and Ken Schwanke will go up by roughly $425, as upon renewing the mortgage for their three-bedroom bungalow in Gold Bar, a neighbourhood in east Edmonton, their monthly payments will increase by 25 per cent, from $1,600 to $2,025.
When Mr. Schwanke first purchased the 1960s property in 2017, he entered a fixed-rate mortgage with a two-year term at 2.9-per-cent interest, which resulted in monthly payments of about $1,435 – an amount lower than Ms. Paradis’s rent at the time.
As Mr. Schwanke subsequently renewed his mortgage, by 2021 the monthly payments had risen to $1,600, about 10 per cent, a number that was manageable for the then recently married couple.
But six months after their last mortgage renewal, interest rates started their steady climb – and today, the new rate will stretch the couple’s finances.
“Because interest rates are a little higher right now, we’re looking to do a two-year, maybe a three-year term,” Mr. Schwanke says. “But it locks it in at a higher rate.”
When the couple renew their mortgage later this month, their interest rate will have jumped from 1.9 to roughly 6 per cent.
To make ends meet, Ms. Paradis and Mr. Schwanke are meticulously tracking their expenses, and making cuts to nice-to-have items, such as fitness and entertainment – but this won’t be enough.
“We have saving goals,” Ms. Paradis says. “But if we want to put away any kind of money at all, there’s really nothing much that we can cut that’s large enough to make a dent in that $425 difference.”
After slashing their least essential costs, the couple would only save about $30 a month. “The next thing that we could cut would be going into our food budget,” Mr. Schwanke says.
Reducing discretionary expenses is a common strategy families use to cope with the rising cost of necessities, but even innocuous cuts can have long-term consequences for households.
According to Elisabeth Gugl, an associate professor of family economics at the University of Victoria, cutting non-essential expenses often goes beyond cancelling a Netflix subscription, some budget adjustments result in increased isolation and reduced well-being.
“If you think about some of the services that people would be taking up in order to stay well and connected, then there’s a social aspect that is missing from their lives,” she says pointing at discretionary spending items such as eating out with friends and fitness memberships.
Moreover, increased costs undermine the capacity of families to save for retirement and to provide a ‘nest egg’ for their children. In other words, when families tighten their belt to accommodate increased mortgage costs, this is likely to have a ripple effect on their children’s wealth.
“If you have younger children, often you also put money away in education savings accounts, so if that saving goes down, then basically it’s your offspring that in some ways might feel some more of a pinch later on,” Prof. Gugl says. “If the parents are in good financial health, then the children are not asked as much to help out later on.”
Households in Canada will go to great lengths to pay their mortgage in time and avoid foreclosure, because unlike borrowers in the U.S., Canadians can’t just walk away from their mortgage, explains Tania Bourassa-Ochoa, a senior economist at CMHC.
“In Canada we have what we call full-recourse loans,” she says. “That means that if a mortgage consumer is no longer able to make their payments and they have to foreclose a property, [if] the value of the property is lower than the mortgage itself, the bank or the financial institution can legally go after the borrower’s other assets.”
This situation is especially concerning in less stable markets such as Edmonton, where home values only rise consistently in the long term, yet most mortgage holders choose the flexibility of short-term mortgages, which are usually under five years long.
In the past five years, Edmonton’s average benchmark price has increased by 3 per cent. By contrast, in the Greater Toronto Area, benchmark prices have increased by more than 40 per cent.
Since Mr. Schwanke purchased his home in 2017, the property’s value has fallen from $410,000, to $402,000. That is, he and Ms. Paradis are paying more for a house worth less – a problematic situation if they couldn’t afford their increased mortgage payments.
At 0.36 per cent, the share of mortgages in arrears in Alberta was the second highest in Canada last year, according to a report of the Canadian Bankers Association. And although this number had been in decline since the summer of 2020, there are reasons to believe this could change.
“Even if we see mortgage delinquencies at a low level, it’s what we call a ‘lagging indicator,’” Ms. Bourassa-Ochoa says. “So we are looking at other credit products: lines of credit, auto loans, credit card payments – and what we’re actually seeing is that there is a slight increase in credit card debt delinquencies.”
Furthermore, as the cost of debt rises, fewer borrowers are able to refinance their mortgage with a conventional lender, as big banks have to follow strict underwriting guidelines. According to a CMHC report, in the third quarter of 2022, 33 per cent of borrowers renewed their mortgage with an alternative lender, that’s 4-per-cent higher than a year prior.
Marc Crossman, an Edmonton mortgage broker, is already seeing an increase in refinancing schemes to consolidate mortgage with other debt.
“At this time of the year, normally we’re doing a lot of preparatory work for the coming spring market, doing more pre-approvals,” he says. “Right now, the reality for us is that we’re doing a lot of refinancing.
“What we are seeing is that clients are in a situation that they can no longer manage, and they have to refinance their properties in order to pay off debts and manage the increase of their mortgage payments.”
Because most homebuyers get a mortgage for the maximum amount they can afford at the time, Mr. Crossman wouldn’t be surprised if mortgage delinquency were to increase in Edmonton.
“The primary reason we’re seeing clients in this situation is because they went with a variable rate,” Mr. Crossman says. “It’s the variable-rate mortgage holders that are overwhelmingly being affected by the change in interest rate.”
This situation isn’t unique to Edmonton, Ms. Bourassa-Ochoa notes. In the past two years, a majority of borrowers in Canada took advantage of the low interest rates variable-rate mortgages offered.
After an unseasonably high influx of new listings in January, the average selling price in Edmonton dropped to roughly $350,000 in February, according to data from the Realtors Association of Edmonton.
Despite this, Edmonton realtors worry about declining affordability.
“With interest rates and inflation both on the rise, housing affordability issues are more prevalent this year as we look forward into our 2023 market,” says Melanie Boles, chair of the Realtors Association of Edmonton.
But there could be hope in the horizon.
“We’re optimistic about a busy spring market with more balance to it,” Ms. Boles adds. “We shouldn’t see the record breaking prices that we saw in spring ‘22, but we are expecting that to transition into a more balanced market.”