Julie Gordon and David Ljunggren

OTTAWA (Reuters), – The Bank of Canada stated Thursday that high indebted households pose a greater risk to the financial system of the country. It emphasized the increasing number of individuals who have bought homes at higher values and is now more susceptible to rate increases.

In an annual financial system overview, it stated that “the Bank is paying special attention to the fact a greater number Canadian households are carrying high amounts of mortgage debt.” This highlights a steep increase in high-ratio mortgages.

These households are more susceptible to falling incomes and rising interest rates.

Although assessing ongoing risk due to high household debt has been more difficult, the central bank stated that overall the vulnerability had increased.

However, overall threats to Canada’s financial system are becoming more severe in the past year due to high inflation, geopolitical tensions and increasing interest rates. Key institutions, however, remain resilient, according the bank.

Bank of Canada raised the policy rate by 1.5% to 1.0% from 1.0% last Wednesday. It was its second consecutive 50-basis points point hike and indicated an aggressive tightening path. The Bank of Canada is trying to control inflation at its 31-year-high.

The pandemic caused housing prices in Canada to soar, with more than half of them rising in just two years. However, the market has been cooling in the recent months. It was unclear if the market pullback was temporary, or whether it marked “the beginning of significant corrections in prices”, according to the bank.

According to the central bank, some Canadians with high levels of debt who obtained mortgages in 2020/21 may see their monthly payment jump up as high as 45% by 2025/26.

Canadian dollars fell 0.4% to 1.2604 against the greenback or 79.34 U.S.cents.