As the holidays approach, Canadians are uncharacteristically “hesitant to spend,” a new report from Desjardins reveals. Instead, the report says consumers are ‘parking’ money in their bank accounts, with around $175B placed in term deposits at chartered banks over the past year, marking an increase of roughly 40%.
Royce Mendes, Managing Director and Head of Macro Strategy for Desjardins, writes that “it’s not hard to believe that Canadians with looming mortgage renewals are getting their financial houses in order before the coming storm.”
Mendes adds that rate resets will be a “significant drain” on household finances in the coming years.
“Should markets be right about the path for interest rates, the worst-off borrowers could see upwards of 70% increases in their monthly mortgage payments,” he warns.
While some borrowers will look to extend the amortizations of their mortgages, others will opt to make lump-sum payments to “soften the blow,” Mendes explains.
“These options, however, come with their own costs,” he continues.
“Making significant adjustments to the amortization schedule of a mortgage can materially alter the long-term financial trajectory of a household. Extending the length of time a borrower takes to pay off debt could add hundreds of thousands of dollars in additional interest payments and would leave the borrower at the mercy of the ups and downs in interest rates for even longer.”
Meanwhile, lump-sum payments represent “a prudent way to de-risk a household’s balance sheet,” Mendes says.
“But the numbers are huge. A homeowner who made a 20% downpayment and borrowed the rest to purchase an average-priced house in Toronto during the pandemic would need to come up with between $80K and $200K to keep their monthly mortgage payment the same when it comes up for renewal.”
Mendes also speaks to the Bank of Canada’s (presumed) next moves in Friday's report, saying that “Canadian central bankers have every reason to hold rates unchanged” at their upcoming meeting, slated for Wednesday, December 6.
“The economy is slowing, labour market tightness is easing, and inflation is cooling. The question is to what extent will they acknowledge these positive developments,” he writes.
“Policymakers want to guard against false dawns. As a result, we expect them to retain language indicating that officials are still ready to raise rates if necessary. For our part, we don’t see them making good on that threat. We expect the BoC is done raising rates for this cycle and will turn to rate cuts in the second quarter of 2024.”