Financial tension is especially strong for tenants

It is tenants who are currently facing the greatest financial stress. However, the situation will get worse for owners who have not yet renewed their mortgage loan.

There has been much concern over the past two years about the damage that rising interest rates could inflict on the finances of mortgage loan holders. However, their financial stress indicators remained “practically unchanged and remain at levels below their historical average,” the Bank of Canada reported Thursday in the 2024 edition of its Financial Stability Report.

The same cannot be said of other Canadians, particularly renters, continues the central bank. Not only have they been using their credit cards more and more in recent months, but their default rates on these cards, as well as on their auto loans, are also on the rise. Declining sharply during the COVID-19 pandemic, these default rates now exceed their pre-pandemic levels.

This is mainly due to the fact that renters generally have lower incomes and assets than owners, Bank of Canada Governor Tiff Macklem explained at a press conference. Although many households built up a financial cushion during the pandemic and then reduced their lifestyle to adjust to soaring inflation and the economic slowdown, a greater share of household budgets Most modest incomes are taken up by essential expenses, such as housing, groceries and transportation, where the increase in the cost of living has been particularly marked.

Future mortgage increases

And then, not all home owners are out of danger. Around 40% have a mortgage. Of these, half have not yet faced an increase in their interest rate, as their payment amounts had been set for five years before the Bank of Canada began raising its key rate. to curb inflation, from 0.25% in March in 2022 to 5% in July 2023.

However, these owners “will generally see a greater increase in their payments than those who have already renewed their loan,” warns the central bank. It is estimated, for example, that those who had to renew a fixed rate mortgage loan of 5 years or more last year experienced a median increase in their payments of 15.3%, but that the increase will be 18 .4% this year, 22.6% next year and 25.8% in 2026, even taking into account the drop in interest rates anticipated by the financial markets. The step will be much higher still for those who renew a variable rate mortgage loan with fixed payments, the increase in payments of 34.4% last year, having nothing to do with that of 61.9% expected in 2026.

“Financial pressure will increase most among households that took out a mortgage in 2021 and early 2022, when house prices were near their peak and mortgage rates were very low,” says the central bank . Fortunately, the incomes of many of them will also have increased.

Small businesses in difficulty

If the financial health of large companies “appears good”, small ones, on the other hand, “show more signs of financial stress”, explained the first deputy governor of the Bank, Carolyn Rogers. “Strongly increasing” over the past year, the number of companies that have filed for insolvency is now double the pre-pandemic average.

This sharp increase in the number of bankruptcies probably results from rising borrowing costs and the slowdown in economic activity, but also from the elimination of government support programs deployed during the pandemic, explains the Bank. An analysis of the data suggests that these programs have artificially kept businesses alive and that we are now seeing the pendulum swing back.

As for banks, “credit quality remains solid overall,” continued Carolyn Rogers. However, it serves as a warning to hedge funds (hedge funds) whose investments currently rely heavily on credit guaranteed by perhaps overvalued assets.

In conclusion, “the Canadian financial system remains resilient,” said Tiff Macklem, in particular because households, businesses, banks and other financial institutions have adapted to the situation. But “this adaptation will still take time”.

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