The Bank of Canada is growing more concerned about the ability of households to handle their debt in the higher interest-rate environment, with more homeowners relying on credit cards to meet expenses in the face of steeper mortgage payments.
Early signs of financial stress for households are emerging and many of them now have less financial flexibility, the bank said in its annual review of the financial system published on Thursday. Recent homebuyers are extending their loans to make payments more manageable: The share of new mortgages with an amortization period longer than 25 years rose to 46 per cent from 41 per cent over the last year.
The heightened concern about households increases pressure on Bank of Canada policymakers as they try to tame inflation without tipping the economy into a severe recession. With Canadian households among the world's most indebted, many economists expect the economy to respond faster and be more sensitive to higher rates than peers.
Households that took on a mortgage between 2020 and 2022 are carrying about 17 per cent more credit card debt on average than those that purchased between 2017 and 2019. Arrears on credit cards have also been rising and are close to pre-pandemic levels.
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