Cost-of-living crisis: What do mortgage holders need to keep in mind?

Inflation and interest rate increases have left many Canadians worried about their financial futures

Cost-of-living crisis: What do mortgage holders need to keep in mind?

These are worrying times financially for many Canadians, with surging inflation and rising interest rates contributing to an acute cost-of-living crisis that shows little sign of easing.

That growing concern was reflected in the recently published 2022 FP Canada Financial Stress Index, which showed that 38% of Canadians view money as their biggest source of stress and over one-third (35%) say anxiety, depression or mental health challenges are arising because of financial worries.

In mid-May, Canadian consumer confidence plummeted at a rate not seen since the worst days of the COVID-19 pandemic, according to the Bloomberg Nanos Canadian Confidence Index, which registered its largest weekly decline since April 2020.

Statistics Canada also shone a light on the financial struggles impacting many Canadians, revealing in its Portrait of Canadian Society survey (conducted between April 19 and May 01 of this year) that the ability of nearly three in four to meet expenses including housing, food, clothing and transportation had been negatively affected by rising rates.

Amid that gloomy outlook, it’s essential that Canadian mortgage holders take the right steps to make sure their financial houses are in order, according to a mortgage expert based in Vancouver.

Daryl Hosein (pictured top), vice president, treasury at Coast Capital Savings, told Canadian Mortgage Professional that borrowers also needed to be fully aware of their existing debt obligations as rates rise and their budgets start to feel the pinch.

“I think what we’re seeing here is Canadian household budgets being squeezed from all angles currently,” he said. “With the current rate increases that we’re seeing, it’s important to take another look at budgeting and really pay attention to what type of debt you have outstanding from credit cards to line of credit loans, as well as mortgage payments.”

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Reviewing current plans and seeing how they fit into a borrower’s overall financial picture is important, said Hosein, who also emphasized the need for homeowners to have a detailed understanding of their current mortgage and how it would be impacted by further interest rate hikes.

That’s particularly relevant for variable-rate mortgages, he added, because while borrowers will be paying the same amount as rates increase, the main change will be what amount of the payment goes toward interest compared with principal.

“So to the extent that you have the ability to look at this and consider increasing your mortgage payments, or potentially even thinking about switching to a fixed rate alternative, would be something that you’ll want to keep in mind and consider your own personal risk appetite [accordingly],” he said.

As public health restrictions, travel bans and stay-at-home orders took effect, Canadians amassed around $300 billion in excess savings over the last two years – and those funds could provide an invaluable safety net against the challenges posed by inflation and rising rates, Hosein said.

“Think about the opportunity to set up an emergency or contingency fund with those savings that you’ve been able to accumulate, so you can keep those aside and keep them separate from your day-to-day expenditures [and] they could be available for you for an unexpected expense or some type of uncertainty that might lie ahead,” he said.

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Tapping into those savings on a regular basis to cover everyday expenses should be considered a red flag, according to Hosein, that should prompt Canadians to revisit their budget and expenditures to unearth ways of cutting spending – whether cancelling unused gym memberships or streaming platform subscriptions to ultimately lower that monthly bill.

“You might be surprised how much you could save by removing those things you’re spending money on that you’re not really getting a lot of value from,” he said.  

StatCan’s recent survey contained another intriguing revelation: that younger Canadians aged 15 to 29 and 30 to 39 were more than twice as likely as those over the age of 40 to report being very concerned about their ability to afford housing or rental costs.

Fifty-three per cent (53%) of Canadians between 15 and 29, and 39% of those between 30 and 39, expressed those concerns, compared with just 20% of Canadians aged over 40. That generational difference could be because the likelihood of older Canadians having already fully paid off their mortgage is higher, StatCan said.