A few weeks ago, I posted about the debt ratios in Canada being quite high, relative to other countries. One question I have been receiving is: “what does that mean when people’s mortgages are up for renewal”?
A key distinction when comparing the US home prices to Canadian home prices: Canada has shorter mortgage terms that reset more rapidly than the US. A typical US home buyer that holds their tax-deductible home mortgage, has a 25-year fixed-rate term, whereas in Canada, 5 years is the maximum that one's interest rates are set.
The chart above is an aggregate, not ones particular situation. But the take-away is that as mortgages come due in the next few years, the cumulative shock to mortgage payments equals about 1% of current nominal disposable income and about 1.5% of current consumption.
I highlight this because we have been fielding a lot of calls about re-financing, looking at mortgage rates, vs. paying off other debt, and working with our partners to right-size their debt and real-estate considerations. As we continue to have these planning conversations with clients, for those who are predicting a complete collapse in the Canadian real estate market, I think this perspective is useful.
Just a few other aspects of the Canadian housing and mortgage system:
- 33% of outstanding residential mortgage credit is insured, which has pros and cons but is a safety backstop.
- Banks are well-capitalized. Mortgages are not put in off-balance sheet conduits that compound high leverage.
- The funding model is relatively more stable in Canada than other banking systems with less reliance upon core deposits.
- Lenders in Canada generally have full recourse as opposed to in the US where its just the value of the home (making it “easier” to walk away from one’s home in distress)
- Lenders and borrowers exist in a system that is often more collaborative in nature. Even in the depths of past shocks like the harsh recession of the early 1990s, Canadians still paid their mortgages as the delinquency ratio remained very low.
Not often I post two graphs/photos in my weekly, but thought I’d add this from my Race last weekend. Over 7,000 participants came out for the RBC Race for the Kids. It was a fun event.
Fortunately, there isn’t an “after” photo, as I was pretty tired!
Ryder Cup Weekend, in Rome. I always cheer for the Europeans to beat the Americans!
Have a great weekend.