Over the next few months a number of homeowners may be faced with what might be the financially devastating impact of renewing their mortgage. The consequences will be especially severe for low wage earners and those with larger-sized mortgages. Unfortunately, many from those sectors will not be able to afford the cost of the renewal and may suffer the crushing loss of their home.
According to Josh Rubin, a business reporter with the Toronto Star, the major banks in Canada are collectively making provisions to set aside more than $3.2 billion to cover bad loans these corporations may be expecting in the near future. The scale of these provisos is illustrated by Scotia Bank, which announced the increase of their loan loss provisions to $1.26 billion which is up from $529 million last year. Financial experts are expecting 2024 to be a tumultuous year as the impact of higher interest rates will be felt by many consumers and businesses.
According to financial experts the residential group most vulnerable are referred to as being “house poor.” That term is used to describe a person who spends a large portion on their total income on home ownership. These are house-rich, cash-poor people who are regularly short of cash for many discretionary items and have difficulty ministering to other financial obligations.
"It is interesting to note that people who are struggling with their debt-to-income ratio are also troublesome to their local economy"
There is a rule of thumb used by experts in the financial industry that is referred to as the “debt-to-income” ratio. This rule suggests that one’s total housing costs — mortgage interest rate, house maintenance, repairs and property taxes — should not exceed 28 percent of their monthly gross income. People who exceed that level are faced with somehow increasing their income or downsizing to lower cost housing or changing to more affordable rental accommodations.
It is interesting to note that people who are struggling with their debt-to-income ratio are also troublesome to their local economy. They have scarcely enough money over their housing costs to spend on purchasing goods and services from local vendors.
In 2022, the Bank of Canada started its campaign to raise the interest rate in an effort to drive down the fast-rising inflation rate. The lending rate at that time was 0.25 percent and now it sits at 5 percent. The theory behind this aggressive campaign is that making it more expensive to borrow money will theoretically curtail consumers and businesses spending and drive prices down.
It would appear that the inflation rate has slackened a bit and the Bank of Canada will likely hold the line on the current interest rate mechanism for the time being. When the economy appears to be improving and inflation is at or about the arbitrary two percent target, the Bank will then slowly and judiciously ease the lending rate.
Meanwhile, hold onto your hat and hope the economy recovers quickly. As my mother’s wisdom advised, we’ve made our bed and now we must lie in it.
