Surprisingly, the Bank of Canada emphasizes in its latest Monetary policy report that, so far, indicators show that financial stress mainly affects households that do not have a mortgage loan.
For example, the central bank indicates a default rate on mortgage products still near their historic lows while, for most credit products, the proportion of borrowers who are late on payments by 60 days or more has continued. disassemble. In particular, delinquency rates on auto loans have exceeded pre-pandemic levels, we read.
It must be said that in times of financial stress, households will do everything to protect their property from pressure from creditors. This may also explain why, according to the latest data from the Office of the Superintendent of Bankruptcy, during the 12-month period ending August 31, 2023, the number of consumer insolvency files increased by 22.2% compared to the corresponding period ended August 31, 2022. However, we see that the number of bankruptcies increased by less than 1% while that of proposals filed jumped by 30%. Between these two comparison periods, the proportion of insolvent consumers who opted for a proposal increased from 73% to 78%.
But the tension remains no less palpable on the budget. According to a report from The Canadian Press, variable rate borrowers have already shouldered the burden of higher rates, with the average increase in their payments being 49%. Those on fixed rates are expected to see their payments increase by an average of 14% to 25% next year compared to costs at the start of 2022. And by 20% to 25% in 2025 and 2026.
It is borrowers with variable rates, but fixed monthly payments – such as a five-year variable – who are exposed to the largest increases. Some have even seen their payments gradually reach the trigger threshold to cover only interest costs, or even less and fall into negative amortization zone. “People benefiting from these products will experience an expected average increase of 44% in their payments by 2026, as their mortgages are renewed,” continues the text from The Canadian Press.
Weight on the budget
According to the specialized site Rate Filter (ratefilter.ca), if owners generally spend less on their housing than renters, on average 34% of pre-tax income compared to 43%, this rate is distorted by the 35% of owners who do not have a mortgage. “Mortgage holders spend on average 41% of their income on housing. »
Here, 44% of employed Quebecers say they spend more than 30% of household income on monthly housing costs (including mortgage, rent, utilities, property taxes, insurance and maintenance). , indicates the annual survey of the National Payroll Institute. As a reference, CMHC applies a ratio of 40% between housing costs and disposable income, a target corresponding approximately to a housing costs/pre-tax income ratio of 30%.
Wave of renewals
Let’s return to the Royal LePage survey, the results of which were published on October 26. In Quebec, 28% of respondents say they will renew their mortgage within a year and a half. Among them, 79% say they are concerned about this meeting. That said, only 10% are considering selling their property and renting. The others are split essentially between changing mortgage lenders, extending the amortization period, extending the term of the next mortgage loan and selling their house to buy a smaller property.
Currently, 94% rely on traditional lenders, such as banks and Desjardins Group, 48% have a five-year term, half have a 25-year amortization and just under two-thirds have repaid half or less of their mortgage.
Among those who have already suffered the effects of rising interest rates on their payments because they had opted for a variable rate or a hybrid mortgage, more of them have had to reduce their discretionary spending (45% of respondents) or, worse, to have cut back on their essential expenses (43%). Follows a reduction in savings, or even a drain on these savings.
Few have had to borrow money from family members or friends, take on additional employment, rent out part of their property, or ask for a payment extension or even a grace period.
We will have to see what happens next. Especially since 75% of respondents say they have a fixed rate mortgage. If we use the calculation of the National Bank economists on the delaying effect of the impact of the increase in interest rates on the economy, 42% of the impact of the increase in the rent of the money since 2022 remains to come.
According to the most recent consumer debt index from the insolvency firm MNP, “Canadians have never been so pessimistic in five years with regard to their debt.” More than half say they are $200 or less away from being able to make ends meet at the end of the month. “The average amount they have available at the end of the month has dropped to $674 while the rising cost of living has significantly eroded their budget. »