Juggling Dynamite

Near half of all new Canadian mortgages taken out in the first quarter of 2023 had amortization lengths longer than 30 years. In addition, as interest rates have leapt since 2022, a significant number of existing variable-rate mortgage holders have paid less than the interest owing, causing principal balances, repayment years and financial risk to leap. See Some Canadian mortgage holders extending amortization by more than double.

Victor Tran, mortgage and real estate expert at Ratesdotca, said in an interview with BNN Bloomberg Thursday that since the Bank of Canada began raising interest rates in March of 2022, some of his clients have drastically extended the amortization for their mortgages.

“I’ve had many clients with amortizations, that are 70, 80, even 90 years remaining, in the extreme cases, and that’s simply because their payments are not going towards any principle at all,” he said. Here is a direct video link.

This week, banking regulator OSFI announced that the largest banks must further increase their capital reserves on hand to cover potential losses as financial system vulnerabilities have elevated. See Financial regulator OSFI raises the minimum capital amount that big banks must have on hand to cover losses:

The federal regulator said current vulnerabilities facing the banking industry include high household and corporate debt levels, the rising cost of debt and increased global uncertainty around fiscal and monetary policy.

Peter Routledge, the Superintendent of Financial Institutions, said households and companies remain highly indebted, making them more vulnerable to economic shocks.

New data from Equifax shows that in the first quarter of 2023, Canadian businesses increased their credit card balances by 15 percent and lines of credit by 11 percent while the total balance outstanding on bank-issued installment loans fell 2.4 percent. See Businesses’ changing credit usage a “worrying trend”: Equifax.

Jeff Brown, head of commercial solutions at Equifax Canada, said the shift in credit usage by businesses is alarming.

“It’s not something we’ve seen in the past few years,” he said. “This is kind of like an early warning indicator.”

Instalment loans are generally used for growth and expansion, Brown said.

“You have to be spending money to be making money as a small business,” he said. “When you see a lapse in that, you see a growth in credit card spends, typically, it’s a sign of financial instability.

…With many businesses already holding extra debt from the pandemic, such as from government loan programs, racking up credit card debt could put businesses in a difficult hole to dig themselves out of, Brown said.

General conditions for businesses are getting tougher, said Pedro Antunes, chief economist at the Conference Board of Canada.

Businesses relying on short-term credit products is “not a good sign,” he said.

Falling average hours worked is leading consumer demand lower while housing inflation is keeping central banks hawkish for longer than in past cycles. Nasty combo.

Chris Harvey, Wells Fargo Securities head of equity strategy, and Frances Donald, Manulife Investment Management chief economist and strategist, join ‘The Exchange’ to discuss the case for a recession in the back half of this year, and the rationale behind the Fed’s pause. Here is a direct video link.