At first glance, 2018 was business as usual, as far as Canada’s household debt goes.
Despite three interest rate hikes by the Bank of Canada (BoC) — which raised the benchmark rate from one per cent to 1.75 per cent — Canadians borrowers didn’t flinch. Collectively, we owe around $1.78 for every dollar of disposable income. The figure, which is close to record highs, has held roughly steady throughout the year.
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We also continue to stay on top of our debt repayments — or at least keep paying off the minimum balance on our credit cards. Consumer delinquency rates — the percentage of non-mortgage loans with payments more than 90 days late — recently dipped to a two-year low, according to consumer credit agency TransUnion.
The good news is that next year promises to continue in the same vein. The not-so-great-news is that below a calm surface, growing pressures will be brewing.
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Interest rates to continue to rise
Beata Caranci, chief economist at TD Bank Group, sees two more interest-rate increases in 2019, which would bring the BoC’s trend-setting rate to 2.25 per cent.
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That would likely add $68 a month to a 2.5 per cent variable-rate mortgage amortized over 25 years with monthly payments of $1,200. Over a whole year, your mortgage would cost you over $800 more.
Something similar will happen if you owe money through lines of credit, which also have variable interest rates.
Even if you have the popular five-year fixed-rate mortgage, you might be in for an unpleasant awakening. If you bought your house around five years ago, your payments may go up this year.
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Around five years ago, in January 2014, the average 5-year fixed rate was 3.34%, according to data provided by Robert McLister, founder of rates comparison site RateSpy.com. By comparison, the average five-year fixed rate this month was 3.54 per cent.
Admittedly, things look better for those who booked their mortgage renewal rate just a few weeks earlier. The average five-year fixed rate for the October-November period in 2013 was 3.46 per cent, only one basis point lower than the 3.47 per cent available to borrowers over the same two months this year, according to McLister.
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But the new federal mortgage rules are a potential obstacle to locking in the best renewal rates available. That’s because Ottawa has mandated a stress test for borrowers hoping to switch lenders at renewal. If you can’t pass the test, you’ll be stuck with your existing lender — with little leeway to negotiate on rates.
Caranci’s team recently scaled back its interest rate forecast for next year from three to two rate hikes. That reflects the recent plunge in oil prices and signs of slowing global growth. Challenges in the energy sector are likely to make Canada’s central bank more cautious, said Caranci. And the first rate increase will now likely happen in March or April, rather than in January, as initially expected.
But even if borrowing costs will probably rise slower than analysts anticipated just a few months ago, debt will continue to become gradually more expensive.
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Flat home prices and financial-market roller coasters
If interest rates continue to rise, home prices are generally expected to flat-line in 2019. The Canadian Real Estate Association (CREA) expects the average national home price to rise by just 1.7 per cent next year, which would likely be below the pace of inflation. That’s better than the 4.2 per cent price drop that the CREA expects for prices this year compared to last year. But it’s a far cry from the 4.2 per cent increase registered in 2017 over 2016.
Of course, where you live matters. Markets in Alberta, Saskatchewan and Newfoundland and Labrador are likely in for price declines, according to CREA. In British Columbia, Manitoba and Prince Edward Island, they’ll probably stay roughly the same, while Ontario, Quebec and the rest of Atlantic Canada are in for decent gains.
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Overall, though, a ho-hum housing market is likely to dissipate the perception of wealth that typically comes when the value of your home keeps skyrocketing year over year, something many Canadian homeowners have become used to over the past decade.
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But while looking at home prices might prove remarkably unexciting next year, the opposite might be true when it comes to the value of your retirement investments. Financial markets are likely in for more wild ups and downs, at least the start of the year, Caranci said.
That “will test people’s nerves,” she said.
The combined effect of stagnating home prices and volatile financial markets is likely to make many people more cautious about both spending and borrowing, Caranci added.
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Don’t worry, the economy isn’t supposed to tank in 2019, as far as most economists can tell.
Low unemployment and decent paycheques will probably continue to enable most of us to keep paying our bills on time next year. Although some expect consumer default rates to start climbing next year, those numbers likely won’t be shooting up as long as the economy holds up, Caranci said.
In fact, even 2020 looks OK so far.
“There is nothing in the data today to tell us there’s going to be a recession in 2020,” Caranci said.
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However, by summer 2019, if things continue as they have, we’ll have surpassed the longest period of economic expansion in modern history, she added. And that means the odds of a recession are rising.
The notion of a future economic downturn, as far away and nebulous as it currently seems right now, should be scary for many Canadians. Needless to say, it’s much harder to keep up with your debt when you’re facing a job loss or pay cut.
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How Canadians can prepare
If your mortgage is due for renewal soon, you may be faced with a tempting offer: stretch out your amortization — the amount of time it takes to repay the mortgage in full — so you can keep your payments the same even with a higher interest rate.
You should bow out of that one with a polite “thanks but no thanks.”
Lengthening your amortization rate means you’ll take longer to pay off your debt and probably pay more in interest.
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Instead of banking on a longer amortization, start planning in advance to soften the impact of higher mortgage rates. You can use an online calculator to see how steeper rates would affect your payments if you keep the repayment period unchanged, Birenbaum suggested. Then you can begin to adjust your budget to that tighter cash flow.
Birenbaum said she’d recommend lengthening the amortization period only “when there’s a cash crunch — and that cash crunch is temporary.” For example, the option might make sense for parents paying daycare or tuition fees that make a significant dent in their disposable income for a few years.
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And if you’re thinking of rolling your higher-interest debt into a larger, lower-interest loan, you may want to avoid lines of credit. Birenbaum, like many other independent financial advisers and debt counsellors, is generally skeptical of consolidating debt through credit lines, whose flexible repayment terms often allow Canadians to just keep on borrowing.
In general, debt consolidation only makes sense when you’ve laid out a clear plan to get out of debt, Birenbaum told Global News. Using a term loan with fixed payments and a set repayment schedule usually makes it much easier to stay on track.
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But lines of credit can come in handy as a source of emergency funds during an economic downturn.
To prepare for the next recession, Birenbaum recommends calculating how long you’d be able to stay afloat if your income disappeared without dipping into your long-term savings.
It’s a good idea to start beefing up your own rainy-day fund. Keep in mind that the average Canadian job seeker took around six months to find a new job during the 2008-09 recession.
But having access to an unused line of credit to weather liquidity shortages in times of crisis is also a good idea, according to Birenbaum.
Bottom line: if all goes as expected, few Canadian borrowers will go belly up in 2019. But many more should treat next year as an opportunity to financially prepare for when the going gets tough.