NEW WESTMINSTER, BC, June 6, 2023 /CNW/ – The Bank of Canada’s announcement on June 7th is not expected 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 a reason 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.” In addition to this, by the end of 2022, 46% of new mortgages had an amortization period that stretched longer than the traditional 25 years; up 12% from 2019, which recorded only 34% of all 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 the President & CEO of the non-profit Credit Counselling Society, Peta Wales. “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 due to a built-up of vulnerabilities, the ability of highly indebted Canadian households to manage through future turmoil caused by a drop in income or a recession could be intensified.
A high level of household spending with a constant dependence on credit will leave consumers exposed with a more limited ability to manage interest rate increases, ongoing inflation, effects on their budget from financial uncertainty, and reduced borrowing options if lenders are forced to tighten up their lending criteria to mitigate losses in light of an economic downturn. Canada also happens to top the list for housing market risk indicators, according to a recent report published by the IMF. The risk for defaults are heightened by high household debt with more variable rate loans and lines of credit, along with higher mortgage payments due to rising interest rates. And the Bank warns that fixed rate mortgage holders aren’t in the clear either. As those mortgages mature over the coming three or four years, a record number of households will need to allocate significantly greater portion of their income to monthly 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 Peta 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 which Canadians are pursuing now in record numbers 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 the Credit Counselling Society. “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.”