The Stocks Most at Risk From Rising Mortgage Payments

Rising mortgage payments could put stocks like EQB Inc. (TSX:EQB) to the test in the months and years to come.

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The Canadian housing market was one of the most consistent growth vehicles since the Great Recession, particularly in major metropolitan areas. Canadians gorged on cheap credit and historically low interest rates, which saw home prices deliver strong and steady growth year after year.

However, the Bank of Canada (BoC) slammed the brakes on the red-hot real estate market with a dramatic change in monetary policy. Soaring inflation rates spurred the central bank to aggressively raise interest rates, which has significantly curbed home sales and price growth.

Today, I want to discuss why policymakers are sweating about mortgage payments in the months and years to come. Moreover, I want to examine two stocks that are certain to be impacted.

Why mortgage renewals have policymakers sweating about the future…

Earlier this month, the BoC stated that mortgage payments could increase by as much as 40% for Canadian homeowners. Canadians in this market are faced with the reality of higher interest rates, which has spiked borrowing rates across the board. Meanwhile, homeowners with a variable-rate mortgage have experienced the highest rate increase among their peers.

Canadians should not expect any relief on the rate front in the near term. Indeed, the BoC has pointed to a robust job market and low unemployment rate as evidence that Canadian workers can manage higher payments. That theory will be put to the test in the months and years ahead.

Here’s a TSX stock that has continued its run in the face of volatility in the housing space

EQB (TSX:EQB) is a Toronto-based company that provides personal and commercial banking services to retail and commercial customers across Canada. Shares of this financial stock have increased 12% month over month as of close on May 19. Meanwhile, the stock is up 16% so far in 2023. Canadians who want to see more of its recent performance can play with the interactive chart below.

This company’s single-family portfolio climbed 33% to $30.3 billion in the first quarter of fiscal 2023. EQB and its peers in the lending space have already started to roll out solutions that will prevent homeowners from seeing a huge spike in payments. The most popular solution involves increasing the amortization period for their mortgages. However, this strategy also carries some long-term risks for borrowers.

Shares of this housing stock currently possess a favourable price-to-earnings (P/E) ratio of 8.7. Moreover, EQB offers a quarterly dividend of $0.37 per share. That represents a 2.2% yield.

Can this high-yield dividend stock survive the coming mortgage storm?

Atrium Mortgage (TSX:AI) is another Toronto-based company that provides residential and commercial mortgage services to a domestic consumer base. Its shares have dropped 5% month over month. Meanwhile, this mortgage stock is still up 8.3% in the year-to-date period.

In the first quarter of fiscal 2023, this company reported quarterly net income of $14.2 million — up 34% compared to the prior year. Atrium released information on its high-quality mortgage portfolio in its first-quarter report. It boasts an average loan-to-value ratio of 60.8%, and 96% of its portfolio is less than 75% loan to value. That is encouraging at this stage.

This housing stock possesses an attractive P/E ratio of 10. Meanwhile, it offers a monthly distribution of $0.075 per share. That represents a superb 7.9% yield.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned. The Motley Fool recommends EQB. The Motley Fool has a disclosure policy.

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