By Ketki Saxena

Investing.com -- In a report released earlier today, the Bank of Canada voiced its increasing concern regarding households' ability to maintain their debt payments. The report highlights that it the Canadian central bank is "more concerned than it was last year" amid rising interest rates. 

“More households are expected to face financial pressure in the coming years as their mortgages are renewed,” the May 18 review read. “The decline in house prices has also reduced homeowner equity, and some signs of financial stress — particularly among recent homebuyers — are beginning to appear.”

The review, published on May 18th, predicts that more households will experience financial strain in the upcoming years as they renew their mortgages. Additionally, declining house prices have led to reduced homeowner equity and emerging signs of financial stress - particularly among recent homebuyers.

The central bank's warning indicates a considerable increase in mortgage payments for numerous borrowers upon renewal. It projects median costs rising by 20% between 2023 and 2026 if rates develop according to current market expectations.

Borrowers with variable-rate mortgages featuring fixed payments can expect the most significant surge in expenses; an increase of up to 40% may be necessary for them to stay aligned with their original amortization schedule. This assumes mortgage renewal occurs during either 2025 or 2026. Meanwhile, those holding variable-rate mortgages with fluctuating payments have already witnessed a near-50% rise in costs – primarily occurring last year.

The central bank's simulation suggests that fixed-rate borrowers might face the largest spike in mortgage expenses during the period of 2025-26 – potentially experiencing hikes ranging from20%to25%. With these findings at hand, homeowners should prepare themselves for potential challenges related to increased mortgage costs and household debt management.