June 5, 2023

Weekly EconMinute—Household income spent on mortgages

In this week’s EconMinute, we’re talking about the share of household income spent on mortgages.

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Buying a home in Canada is expensive—especially in markets like the Greater Golden Horseshoe, Metro Vancouver, Victoria, Ottawa, and beyond. But topline home prices are only one measure of affordability. Mortgage payments have increased due to the interest rate hikes since March 2022.

The Bank of Canada pays special attention to the mortgage debt service ratio (DSR) for new mortgage holders—the share of a household’s income that is spent on mortgage payments. Specifically, they look at the share of new mortgages that absorb over one-quarter of a household’s income. The greater that share is, the more that future household spending and savings will be constrained. This means households may have to forego retirement savings, spend less on leisure, or make difficult decisions about necessities that many take for granted.

Since interest rates started rising from historical lows in March 2022, mortgage carrying costs relative to household incomes have increased substantially, especially compared to the previous 8 years:

  • As of quarter 4 2022 (Q4 2022), about 28.8% of all new mortgages absorb more than one-quarter of household income—over double the level prior to the current rate hike cycle.
  • This figure increases to 44.0% for first-time homebuyers as of Q3 2022 (latest available data)—about 2.8 times more than before rate hikes began.
  • For repeat homebuyers—individuals who have had a mortgage previously—36.8% of mortgages cross the one-quarter DSR threshold as of Q4 2022 (four times pre-rate hike levels).
  • For investors—or people with a new investment property and already have a primary residence—21.7% of new mortgages are higher than the one-quarter household income threshold (Q3 2022).

For new and existing mortgages, the median mortgage debt servicing payment requires 19.3% of household income (as of Q4 2022), up from 16.3% in March 2022. Of these, first-time homebuyers are spending the greatest share (23.4%, up from 19.4%), followed by repeat homebuyers (20.7%, up from 18.0%) and investors (16.1%, up from 12.5%). Mortgage DSRs for first-time homebuyers are relatively high because the owners are likely younger and have lower incomes and less wealth to leverage into lower mortgage payments.

As mortgage renewals continue rolling out, the impact of interest rates is expected to increase mortgage DSRs in the months and years ahead.

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