By Nina Dragicevic

Between inflation, housing costs and interest rates, debt is ballooning for many younger Canadians.

Scott Terrio sees it all the time. The manager of consumer insolvency says the average credit card balance in Canada is less than $4,500, but the cases he saw last year averaged more than $12,000 for this young group.

Terrio helps clients cut deals with creditors and avoid bankruptcies, if possible, at Hoyes, Michalos Licensed Insolvency Trustees. Looking at his 2023 filings for clients aged 18 to 29 across Ontario, he said average credit card debt was up 34.5 per cent from 2022.

Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada Inc., notices the same trend. The national non-profit organization usually works with Canadians on education and debt restructuring but also sometimes refers clients to insolvency firms if their situation is dire.

“We looked at Q1 for 2023 versus Q1 for 2024,” Schwartz said of the firm’s clientele. “And specifically for those people that were under 40, in our client base, we’re seeing that the debt loads for those people has increased about 27 per cent. Like all of a sudden, when people aren’t making that much more, if anything more at all … not to mention the interest rates that have gone up over the last little while, then it becomes more and more of a challenge.”

This represents a large demographic for Consolidated Credit, he added. Over half of its clients are under the age of 40.

Terrio said his clients show up with the “typical Canadian financial life” — starting with a credit card at 18 and a student loan, then card companies keep increasing the limit and consumers run up their debt. Seeing the interest load, these people then get a line of credit with lower interest rates and transfer the balance there.

Now, Terrio said, they feel relieved — and they keep spending.

Once they flip their debt to a line of credit, he said consumers should cut up their credit card and live on cash flow as much as possible. But their debit card sits unused, while they keep tapping credit everywhere instead.

“They run their Visa back up because they didn’t cut up their card,” Terrio said. “So now the banks got you three times, and they got you for life.”

Terrio said it’s the same story over and over again, and is critical of ever-increasing limits offered to young people when financial literacy is typically at its lowest.

“I’m always the first person these people have spoken to who’s helped them in their financial adult life,” he said.

It’s impossible to ignore current market conditions, however.

As Schwartz pointed out, Canadians are feeling the squeeze between incomes that haven’t kept up with the cost of living, housing crises in markets across the country, and rising interest rates brought in to control inflation.

Managing spending and debt becomes a tightrope act, especially for younger people, Schwartz said.

“So with the advent of social media, and the ease with which someone can buy something online, we’re finding that consumers have adopted these behaviours whereby they’re trying to keep up with their friends and family,” he said.

He also warned against so-called lifestyle creep, when people start making a bit more money, and just start spending more.

“They may see a slight increase in their income, and they think, ‘Oh, I just kind of hit the lottery, and now I’m going to spend like crazy,’” Schwartz said. “And it’s tough to change those behaviours after it’s been ingrained for a long period of time.”

To prevent this from happening, track spending diligently — you can download apps for this purpose — and delay milestones such as moving out or getting a car if you can, Schwartz said. Build up an emergency fund in case you lose your income or suffer a financial setback, to avoid falling into serious debt.

“If you have the opportunity when you’re young, when you’re not spending as much on rent, you’re not spending as much on food, if you can cut back on how much you’re socializing — that’s a great place to start to build up that reserve fund,” Schwartz said.

Live within your monthly cash flow — using your debit card or cash — and develop a short-term austerity plan to make big strides on debt repayment, Terrio said.

Summer months are tough for austerity because you want to socialize, he pointed out, but January through March are a good time to adhere to a severe budget. Up to 40 per cent of your non-rent income should go to debt, Terrio said, noting short-term austerity is tolerable because it’s over quickly.

Ultimately, the aim is to reach the tipping point when at least half of your debt payment is going to the principal — and the portion going to interest starts to slide. Never use an instalment loan, he added.

“All these 36 to 48 per cent interest loans that are $10,000 — if you get one of those, you’re done,” Terrio said. “You’re never, ever getting out.”

Once you’re free of debt, stay that way. Keep your credit limit low and turn down offers to increase it, Terrio said. If you move debt to a line of credit, stop using your credit card.

“You decide how much debt you’re going to have, not the bank, right?” Terrio said.

“I know it’s tempting. If they give you a credit card for $20,000, don’t take it, just take $5,000. Because if you get into $5,000 debt, we can fix that. You can fix it. If you get into $20,000, I have to fix it, right? You’re in my office.”

This report by The Canadian Press was first published May 28, 2024.

Re-posted from Canadian Mortgage Trends.

Mortgage borrowers are increasingly opting for variable-rate mortgages, a trend that is expected to continue as the Bank of Canada continues to lower interest rates.

As of the first quarter, 12.9% of new mortgage borrowers opted for a variable-rate mortgage, according to figures from the Bank of Canada.

That’s up from a low of 4.2% reached in the third quarter of 2023, but down from a peak of nearly 57% of originations reached during the pandemic when most variable rates were available for less than fixed-rate products.

A variable-rate mortgage is one where the interest rate can change over time, typically in relation to the Bank of Canada’s overnight target rate.

More recent data show that while the popularity of variable-rate mortgages eased heading into the spring—and just ahead of the Bank of Canada’s quarter-point rate cut in June— their share of originations are up 50% from a year ago.

“But for context, they accounted for just 9% of total originations in April and were 90% lower than the same month in 2022,” noted Ben Rabidoux of Edge Realty Analytics.

Still, variable-rate mortgages are expected to regain a larger share of originations in the months ahead.

“I do expect that we’ll see a sharp increase in variable originations in the next few months once it becomes clear that the Bank of Canada really is on a serious rate-cutting cycle,” he wrote in his newsletter to subscribers.

Meanwhile, shorter fixed-rate mortgages are among the most popular choices for today’s borrowers, as they balance a shorter term and competitive rates. More than 50% of new mortgage borrowers selected a 3- or 4-year fixed term in April.

The Bank of Canada figures also showed that mortgage credit growth reached a 24-year low in the month of just 3.4%.

“We’d rather act too early and aggressively”: OSFI on managing risk

In a recent webcast, the head of Canada’s banking regulator emphasized the importance of proactive risk management when it comes to financial stability.

“We would rather face criticism for acting early and too aggressively than face criticism for acting too late,” said Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI). This proactive stance is crucial to maintaining stability in Canada’s financial system.

He noted that the financial system is highly interconnected, meaning that weaknesses in one area can quickly spread, and that it’s OSFI’s role is to mitigate those risks.

“Our job at OSFI is to make sure that everyone within our jurisdiction remains well prepared to withstand shocks that could occur,” he said. “I would say the shocks that we feared last year never materialized. I hope I can say the same thing next year.”

Routledge also touched on the high interest rates that have posed challenges to households and businesses, requiring vigilance with regulatory measures to maintain financial stability.

That includes OSFI’s announcement in March that federally regulated banks will have to limit the number of mortgages that exceed 4.5 times the borrower’s annual income, or in other words those with a loan-to-income (LTI) ratio of 450%.

OSFI has said previously that this new loan-to-income limit will help “prevent a buildup of highly leveraged borrowers.”

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What higher-than-expected inflation means for future Bank of Canada rate cuts

Canada’s headline inflation rate rose to 2.9% in May from 2.7% in April, surpassing economists’ expectations and adding some uncertainty to the timing of the Bank of Canada’s future rate cuts.

The Bank of Canada’s preferred measures of core inflation also edged higher, with CPI-median rising to 2.8% (from 2.6% in April) and CPI-trim increasing to 2.9% (from 2.8%).

Shelter costs remained the largest contributor to overall inflation, holding steady at an annual rate of 6.4%. Rent inflation accelerated to 8.9%, while mortgage interest costs slightly eased to 23.3%.

The results were “clearly a step in the wrong direction,” noted BMO Chief Economist Douglas Porter.

“With inflation back on a bumpy path, the outlook for BoC moves is similarly bumpy. For now, our official call remains that the next BoC rate cut will be in September, and this report does nothing to move that needle,” he wrote.

TD’s James Orlando emphasized that “one bad inflation print doesn’t make a trend,” and that inflation remained below 3%.

“But it does speak to the unevenness of the path back to 2%,” he said, agreeing that the central bank will likely wait until September before delivering its second rate cut.

This article was written for Canadian Mortgage Trends by:

Mortgage payments can sometimes be a tricky topic for some homeowners, leading to confusion about when payments are due and what time period they cover.

Recently, we watched two client misunderstandings unfold, highlighting the need for clear, calm communication. Let’s delve into their cases and clarify why mortgage payments are made in arrears, not in advance.

Note to our readers: For client privacy, the names of the subjects in this story have been changed. The values mentioned in this story are accurate and true. The case studies in the article below are presented to educate Canadians regarding mortgage payments and their timing.

Case study 1: Agatha’s private mortgage confusion

Agatha accepted a 1-year private first mortgage on May 31, 2023, providing 12 post-dated cheques from July 1, 2023, to June 1, 2024.

When her lender contacted her in April 2024 about renewing or paying off the mortgage, Agatha was surprised. She believed the maturity date should be July 1, 2024, arguing with her lender that her final payment on June 1st should cover an additional month.

Agatha’s mortgage terms:

• Mortgage terms: Agatha’s registered mortgage document specified a “Balance Due Date” of June 1, 2024, with payments calculated “monthly, not in advance.”
• Payment timing: Mortgage payments are made in arrears, not in advance. This means the payment on June 1 covers the month of May, not the upcoming month of June.

Outcome: Don’t be quick to blame!

Despite the lender explaining this, Agatha was only convinced after consulting her real estate lawyer.

Unfortunately, due to her initial hostile reaction, the renewal offer was withdrawn, forcing Agatha to start all over with a new lender. This misunderstanding on Agatha’s part cost her significant fees and out-of-pocket expenses to refinance this mortgage with a different lender.

Understanding payment timing: arrears vs. advance

Mortgage payments are made in arrears, meaning the payment you make at the beginning of the month is for the previous month’s interest and principal. This is different from many other payment types, which are often made in advance.

Understanding whether payments are due in advance or arrears can be confusing. Here are some examples:

• Mortgages: Payments are typically made in arrears, covering the previous month.
• Car financing: Payments are also made in arrears.
• Car leasing, cell phone contracts, and insurance: Payments are usually made in advance.

Case study 2: Mahi and Amir’s renewal mix-up

Mahi and Amir had a 5-year mortgage renewing on June 1, 2024. They arranged a new mortgage with a different bank, setting the closing date for May 31, 2024.

However, the closing was delayed to June 3, 2024, leading their old bank to collect a full payment on June 1, 2024.

Mahi & Amir’s mortgage terms:

• Payment misunderstanding: Mahi thought the payment on June 1 was for the month of June and expected a refund for most of it. However, like Agatha, she learned the payment on June 1 covered the previous month of May.

Their outcome: Why it pays to keep cool

Similar to Agatha’s case, the payment made on June 1, 2024, covered the mortgage for May, not June. This concept of arrears was initially confusing for Mahi and Amir, but consulting with our team and then their real estate lawyer helped clarify the situation.

After this consultation and reviewing the payout details, Mahi and Amir understood the timing of their mortgage payments and avoided further confusion.

Note: Your mortgage adjustment date (first day when interest will begin to accrue on a home mortgage) is a one-time adjustment on the funding day, which can add to the confusion. Always check with your lender, real estate lawyer, or a licensed mortgage professional if you’re unclear about the terms of your mortgage.

Key takeaways

Always double-check your mortgage documents and confirm with your lender how your payments are structured. Understanding the payment schedule can save you from potential confusion and ensure you’re always prepared for your financial commitments.

Don’t let mortgage payment timing stress you out! Remember, unlike rent, your mortgage is always paying off the past, not pre-paying for the future. Think of it as catching up with your financial responsibilities, not getting ahead of them.

By understanding these details, homeowners can better navigate their mortgage agreements and avoid unnecessary misunderstandings.

If in doubt, always consult with an industry professional to clarify your specific situation. Clear communication and understanding of these terms prevent misunderstandings and  help maintain a smooth relationship with your lender.

This article was written for Canadian Mortgage Trends by:

Payment shocks at renewal due to shorter mortgage terms have become a growing concern for many Canadians. This has led some to question whether adopting longer mortgage terms, similar to those in the United States, would provide greater financial stability.

While Canadian lenders can theoretically provide 15-, 20-, 25-, or even 30-year mortgage terms, market realities and consumer preferences pose substantial challenges.

“The reason we don’t have long term mortgages in Canada is not because they’re illegal, it’s because within the Bank Act… banks are limited on what they can charge for prepayment penalties if you break the mortgage,” Edge Realty Analytics founder Ben Rabidoux explained at a recent conference in Toronto.

“There’s a tremendous amount of interest rate risk embedded in giving someone a 30-year mortgage and then having them break it down the road,” he continued. “So, the banks are like ‘we’re never going to offer 30-year mortgages if we have no way of ensuring that you’re going to stay within that.’”

This issue is particularly pressing as 76% of outstanding mortgages in Canada are expected to come up for renewal by the end of 2026, with the associated payment shocks expected to lead to a rise in mortgage delinquencies.

Assuming no change in interest rates by then, the median payment increase for all mortgage borrowers would be over 30%, while fixed-payment variable-rate borrowers would see their payments rise by over 60%, according to Rabidoux.

Longer terms used to be common

Although 5-year terms are the default option today, Canadians once had a broader range of choices for their payment cycles. In fact, Bruno Valko, VP of national sales for RMG, recalls a time when lenders provided a wider variety of options.

“When I was VP of sales at First Line Mortgages, we had 15-, 18- and a 25-year [fixed-rate terms] available back in the early 2000s, and we sold some, but not many,” he told CMT. “Now, I don’t think lenders have anything more than 10.”

This is in contrast to the mortgage market south of the border, where American homebuyers typically lock in a rate for the entirety of their mortgage term and enjoy an open mortgage that allows them to refinance or pay off the loan early without significant penalties.

“They’re fully open, so who cares? There’s no IRD [interest rate differential] potential,” Valko says, adding that open mortgages are available in Canada, but at a significant rate premium. “You’re going to be paying an astronomical amount of additional interest, so people choose not to do it.”

At the same time, Valko says that as more Canadians find their personal financial stability shaped by the Bank of Canada’s interest rate decisions, many are starting to wonder if there’s a better way forward, one that lets consumers lock in their rates for longer.

“They can do it right now; it’s just that the prices are fairly expensive,” said Peter Routledge, head of the Office of the Superintendent of Financial Institutions (OSFI), at a recent Parliamentary finance committee hearing. “In aggregate, if the product set evolved in that way, that would be a net benefit to the system because it gives mortgagors more choices to manage their personal financial risks.”

Canadian mortgages tied to U.S. rates

The biggest irony in our current system, according to Valko, is that Canadian mortgage rates are much more dependent on the American economy than the domestic market, yet Canadians feel those shocks more acutely.

Fixed mortgage rates are priced based off the Government of Canada’s 5-year bond yield, which has historically been closely tied to the 10-year U.S. Treasury bond, which is itself influenced by U.S. economic indicators like inflation and employment.

“It doesn’t matter what happens in Canada, what matters is what happens in the U.S.,” he says.

“So, if we are so tied to the U.S. in terms of where our mortgages are priced, why do we not have a similar mortgage program?” Valko asks. “It would make sense that our mortgage programs be more aligned with the country that influences our mortgage rates.”

What would happen if Canadians had longer mortgage terms?

Though it’s not financially feasible for most banks today, Valko says a move away from the 5-year term standard would allow Canadians to enjoy greater financial stability, while the Bank of Canada would play a much less significant role in their daily lives.

“The consumer has many advantages, particularly if they don’t want to sell,” he says. “They don’t have any changes in payments and they don’t have the anxiety of a renewal coming up, none of that.”

At the same time, Valko warns that because Canadian household finances are so closely tied to interest rates—through their mortgages and other loan products—the Bank of Canada wields greater influence with monetary policy changes, its primary tool for tackling inflation.

“In the U.S., you could argue that [the Federal Reserve] has to go much higher [when raising interest rates] because the impact is much less; it doesn’t impact a lot of their mortgages,” he says, adding that is why Canada has been able to start lowering its interest rates earlier than its southern neighbour.

The most obvious argument in favour of keeping things as they are, however, was perhaps the 2007-08 Financial Crisis.

“We were one of the best in the world in terms of being able to weather the subprime mortgage crisis,” Valko says. “Our system was strong, our system was able to weather that, and other countries weren’t as strong.”

OSFI’s Routledge made a similar observation during his Parliamentary finance committee apearance, saying many of his central bank peers around the world are “envious of the track record of credit quality in our mortgage system.”

“Every country’s mortgage system is a reflection of its history and its regulatory policy. I would start by saying Canada’s mortgage system has worked quite well,” he said.

Why longer-term rates may soon have more appeal to Canadians

While the Bank Act keeps longer-term mortgage options at a higher price point, there is a chance that Canadians will be willing to pay that premium to lock in rates for longer, given recent interest rate fluctuations.

In fact, Valko says he’s seen it happen once before, when the high interest rates of the late 1990s plummeted during the dot-com crash of early 2001.

“People back then saw 7.25% [mortgage rates on a 5-year term] for such a long time, and then when 10-year terms were offered at, let’s say, 5%, people said, ‘Wow, that’s way lower than the seven and a quarter 5-year term that was available last year,’” he says. “If people are looking at 5% mortgage rates now, and let’s say [once rates drop further] the 10-year is offered at four and a quarter, I think people would be inclined to take it.”

Currently less than 5% of Canadian mortgage borrowers have a 10-year term due to the higher interest rates associated with longer terms and the high likelihood of breaking the mortgage early, which would result in substantial prepayment penalties.

As Rabidoux alluded to earlier, these penalties, especially if the mortgage is broken within the first five years, can be particularly severe.

However, he does think Canada will eventually move to adopt longer terms similar to those available in the U.S.

“It’s a good idea,” he said. “I think it’s probably coming, but it’s probably at least a few years out.”

This article was writtenf or Canadian Mortgage Trends by:

Canadian Home Buyers Remain On the Sidelines In April As New Listings Surge.

The Canadian Real Estate Association (CREA) announced today that national home sales dipped in April 2024 from its prior month, as the number of properties available for sale rose sharply to kick off the spring housing market.

Home sales activity recorded over Canadian MLS® Systems fell 1.7% between March and April 2024, a little below the average of the last ten years.

New Listings

The number of newly listed properties rose 2.8% month-over-month.

Slower sales amid more new listings resulted in a 6.5% jump in the overall number of properties on the market, reaching its highest level just before the onset of the COVID-19 pandemic. It was also one of the largest month-over-month gains, second only to those seen during the sharp market slowdown of early 2022.

“April 2023 was characterized by a surge of buyers re-entering a market with new listings at 20-year lows, whereas this spring thus far has been the opposite, with a healthier number of properties to choose from but less enthusiasm on the demand side,” said Shaun Cathcart, CREA’s Senior Economist.

Bottom Line

With sales down and new listings up in April, the national sales-to-new listings ratio eased to 53.4%. The long-term average for the national sales-to-new listings ratio is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

There were 4.2 months of inventory on a national basis at the end of April 2024, up from 3.9 months at the end of March and the highest level since the onset of the pandemic. The long-term average is about five months of inventory.

“After a long hibernation, the spring market is now officially underway. The increase in listings is resulting in the most balanced market conditions we’ve seen at the national level since before the pandemic,” said James Mabey, newly appointed Chair of CREA’s 2024-2025 Board of Directors. “Mortgage rates are still high, and it remains difficult for many people to break into the market, but for those who can, it’s the first spring market in some time where they can shop around, take their time and exercise some bargaining power. Given how much demand is out there, it’s hard to say how long it will last.

The upcoming CPI data for April, released on May 21, will be crucial for the Bank of Canada. Given the strength in the April jobs report, the Bank is likely to hold off cutting interest rates until July.