Avoid Shifting Into a Summer of Spending: Storm Brewing for Household Finances in Canada
NEW WESTMINSTER, BC, June 6, 2023 /CNW/ - The Bank of Canada's announcement on June 7th is not anticipated to provide the major relief that Canadians suffering from high HELOC and mortgage payments due to increased variable interest rates, need or want. As a result, experts at the Credit Counselling Society caution that using summertime sun-and-fun as an excuse to begin a 'season of spending' will simply lead to a Fall of frustrations and regret.
The Bank of Canada's Financial System Review published in May notes that Canadians who "took on a mortgage between 2020 and 2022 are carrying over about 17% more credit card debt, on average, than those that purchased between 2017 and 2019." Additionally, by the end of 2022, 46% of new mortgages had an amortization period longer than the traditional 25 years; up 12% from 2019, which saw only 34% of new mortgages having an extended amortization period.
"The benefit of a longer amortization is lower payments, however, it's important to match that with reduced household spending, rather than relying on a lower interest HELOC to make ends meet. This unfortunately gives consumers a false sense of their financial wellbeing," explains Peta Wales, President & CEO of the non-profit Credit Counselling Society (CCS). "It is concerning, because while helping homeowners get by, this short-term solution comes at a longer-term cost."
According to the Bank's Review, households are still managing to get by, despite high debt loads and vulnerabilities exposed by options to manage higher payments. However, the Bank also cautioned that the ability of highly indebted Canadian households to manage through future turmoil caused by a drop in income or a recession could be intensified due to a built-up of vulnerabilities.
High household spending with a reliance on credit will leave consumers exposed with a limited capacity to manage interest rate increases, ongoing inflation, effects on their budget from financial uncertainty, and fewer borrowing options if lenders are forced to tighten up their lending criteria to mitigate losses in light of an economic downturn. Canada also tops the list for housing market risk indicators, according to a recent report by the IMF. High household debt with more variable rate loans and lines of credit, along with higher mortgage payments due to rising interest rates, heightens the risk for defaults. And the Bank warned, fixed rate mortgage holders aren't in the clear. As those mortgages mature over the next three or four years, a record number of households will need to spend significantly more of their income on mortgage payments.
"It is crucial that all Canadians, but homeowners in particular, take stock of where they're at financially and challenge themselves not to normalize debt," explains Wales. "No one knows when rates will come down, but it's unrealistic to expect they will hit rock-bottom any time soon. Work with interest rates realistic in today's environment to come up with a plan to deal with your debt."
Longer amortization periods result in lower monthly mortgage payments and lower debt servicing ratios - which can leave room to take on more credit - while simultaneously undermining how quickly equity is built up in what is arguably most Canadians' biggest asset. Indicators of financial vulnerabilities identified by the Bank of Canada highlight the troubling trend of 90-day arrears by credit type, with installment loans far exceeding credit cards, car loans, unsecured lines of credit, mortgages and HELOCs.
"We find that most people do their best to keep up with their housing payment, either their rent or mortgage," notes Isaiah Chan, Vice President of Programs & Services at CCS. "If someone starts missing other payments and tries to juggle which bill to pay and which to skip for another month, those are warning signs they shouldn't ignore. It won't be long before they can't keep up with their housing expenses, which is highly stressful and can cause things to spiral out of control quickly. The best thing they can do is to reach out for help with their debt before this happens. We're just a phone call away and are happy to help."
The Credit Counselling Society is a non-profit organization dedicated to helping consumers manage their money and debt better. CCS provides free, confidential credit counselling, debt repayment options, budgeting assistance and financial education. Visit nomoredebts.org to learn more.
SOURCE Credit Counselling Society
Media Inquiries: The Credit Counselling Society has spokespeople from across Canada available for interviews to discuss this topic in more detail as well as any other relevant financial topics. Please feel free to reach out to the number below: John Lock, Director of Marketing, Direct: 604.636.0277, Email: [email protected]
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