We keep seeing more articles about Canadians pretty much on the edge financially. Here is another article discussing just how serious it is: Nearly Half Of Canadian Homeowners Aren’t Prepared For Emergency Expenses: Manulife Bank Survey.It seems that relatively small changes in interest rates will put many Canadians over the edge.
There are a number of serious issues that need to be considered here.
First of all, what are the implications for the banking system? You’ll note of late that Canadian bank stocks have been hitting new highs on the Toronto Stock Exchange. It would seem that investors are oblivious to the risk that are in the residential mortgage portfolios of banks and mortgage lending concerns. As to why this is the case is more than a little difficult to figure out. Perhaps investors are thinking that the CMHC and or the federal government will bail them out no matter what happens. This is likely true. There is a history of the government of Canada managing the financial system players quietly and behind the scenes. This happened in 1987 when the Canadian investment banks were floundering and the Canadian government arranged a number of shotgun weddings in the name of financial market stability.
Secondly, what are the implications for real estate prices if Canadians are so stretched? Well, it would seem that once again the banks are there shoring up the lending binge through home equity lines of credit. These financial products are, I believe, the reason why Canadians can continue to stay afloat even though incomes are stagnant and housing prices continue to rise.
What’s the answer?
There is no way out of this seemingly never-ending issue that will not be painful. But the time to think about it is now. There are a number of steps that individual Canadians can take to whether the storm when and not if it arrives:
- Canadians should budget NOW. Looking at budgeting as the tool to help you weather the storm. At least a budget or cash flow forecast will give you some idea as to what your exposure is. How much pain will you have when interest rates rise. Don’t be fooled by the pronouncements by the Bank of Canada that they will keep interest rates low. This is their paly on short-term interest rates. Mortgage rates have already started to inch up;
- Understand the terms and conditions of your mortgage. If you need help because of financial distress, approach your lender early rather than late. If you try to negotiate with them when you on or over the edge, it’ll be pretty difficult;
- There are many of us who are reluctant to talk to financial institutions. Seek out the assistance you need. That party may be able to help you renegotiate the terms and conditions of mortgage or HELOC. Perhaps it’s missing a payment , changing the amortization period of your debt or something more creative. If you need assistance, make sure that you have someone available to you when you are in need.
Make the plan to deal with problems before they become problems. When you’re into it, it may be too late. Lenders will appreciate an organized approach as it protects them as well. Financial institutions are not in the business of selling residential real estate. They are in the business of lending money and getting paid back. Anything that demonstrates your willingness to protects the lenders’ interests and not just your own, will have a significant payback.
Do it now
I can’t overemphasize the need for a plan. Do it now! It will save you a lot of headaches and sleepless nights and money!