Tag: mortgage rates

THE HOUSEHOLD DEBT-TO-INCOME RATIO: HOW COVID-19 CHANGED THIS 1 SIMPLE EFFECTIVE MEASURE

Post author By Brandon Smith
Post date March 14, 2022

We hope that you and your family are safe, healthy, and secure during this coronavirus pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Household debt-to-income ratio: Understanding the debt-to-income (DTI) ratio

Your household debt-to-income ratio indicates how much of your gross monthly income goes toward paying off your debt. In order to find your DTI ratio of household debt percentage, multiply the result by 100. The debt-to-income (DTI) ratio is a measure of how much income a person or organization generates in order to service household credit market debt.

Based on income, the household debt-to-income ratio, or as it is also called, the household debt service ratio, measures a family’s ability to pay monthly debt obligations. Divide the monthly debt obligations by the gross income to calculate the DTI ratio.

When considering a mortgage or loan, the household debt-to-income ratio is a critical metric. You may find it more difficult to get a mortgage if your household debt-to-income ratio is high, or you may end up getting smaller loan approval. Your household debt-to-income ratio is calculated using your income, debt, and credit (mortgage) accounts.

I wrote a blog almost one year ago on the Canadian household debt-to-income ratio at that time. At the time of the COVID-19 pandemic, I discussed what happened to the household debt of Canadians.

I provide an update one year after discussing a recent report by Statistics Canada about the household debt-to-income ratio in Canada during the fourth quarter of 2021.

Household debt-to-income ratio: Debt-to-income ratio example

Here is an easy-to-understand example. Sally is looking to get a loan and is trying to figure out her household debt-to-income ratio. Sally’s monthly bills and income are as follows:

monthly mortgage debt payment (P+I): $1,000
monthly auto loan payments: $500
credit card debt monthly payment: $500
household gross monthly income: $6,000
Sally’s total monthly debt payment is $2,000:
Sally’s household debt service ratio is 0.33:
0.33 x 100 = In other words, Sally has a 33% household debt-to-income ratio.

Household debt-to-income ratio: Pre-pandemic debt pressures

Prior to the pandemic, household debt Canadians carried increased steadily. During the last decade, more and more Canadian homes carried debt. Canadian household debt-to-income ratio was 150% in 2012, according to Statistics Canada.

In other words, the increase in debt was rising at a rate of $1.50 for every dollar of income. A DTI ratio of 175.4% was reached in the first quarter of 2020. Before the pandemic, Statistics Canada estimates the household debt-to-income ratio was 181.1 percent.

Debt increases can negatively affect a household’s bottom line, and the larger the debt, the greater the negative impact.

The impact of COVID-19 on the household debt-to-income ratio in 2020: The temporary income boom of 2020 supported Canada’s household debt.

Even if the federal and provincial government financial income support payments given to Canadians through the COVID-19 Economic Response Plan aren’t considered an income surge, it is an income rise.

Fndings released by Canada Mortgage and Housing Corporation (CMHC) in November 2020 showed that the government assistance did help Canadians cope with their household debt.

In the CMHC report, the following were the key findings in Canada:

By the end of Q2 2020, Canada’s household debt ratio is 17% lower than Q1’s 158%.
Likewise, the home mortgage DTI ratio fell from 115% to 105%.
A rise in household disposable income caused these declines.
The amount of outstanding household debt in Canada did not change.

Canada’s household disposable income increased by almost 11% between Q1 and Q2 of 2020 and by 15% year over year. The extra cash doled out by governments caused this. This new cash in bank accounts was not from greater household savings.

After the government temporarily transferred money to Canadian families, the household debt-to-income ratio declined to the lowest level since 2010.

Household debt-to-income ratio: Uncertainty in household debt during the second wave of COVID-19

During the second wave of the COVID-19 pandemic, the financial situation of Canadians had changed significantly. Especially in the financial real estate industry, the DTI ratio is an indication of financial obligations as a vulnerability.

The Canadian financial institutions stopped deferring mortgage payments at the same time. Even with the then extremely low-interest mortgage rates on mortgage loans, this obviously led to concerns about Canadians’ ability to make their mortgage payments. Other government assistance programs ended.

With the end of government support programs that temporarily boosted monthly household income, Canadians faced uncertainty about how they will be able to carry and pay down their household debt.

In the second quarter of 2021, the household debt-to-income ratio of Canadians decreased in all significant Canadian cities. Normally, such a decline would indicate a general improvement in families’ monthly income, their ability to afford monthly payments and pay off financial debt, be it mortgage debt service or consumer debt such as auto loans and credit card debt service.

Subsidies from the federal government effectively helped households to pay off debt. Canadians were more than likely able to lower their non-mortgage debt during those months. However, the mortgage component of Canadian household debt has increased in the majority of metropolitan areas while employment has decreased.

household debt-to-income ratio

Canada household debt-to-income ratio: What my predictions of financial challenges for 2021 were

I predicted that as the economy recovers from the economic effects of the Coronavirus, Canadians will be facing a great financial challenge. As a result of the COVID19 pandemic crisis, Canada’s economy pretty much stopped.

Many Canadian families have experienced extensive income losses as a result of this. For those who are heavily indebted, this is particularly true. A key concern with regard to financial stability is whether homes can keep up with their financial obligations. A financial crisis may very well befall highly indebted Canadians.

Bank of Canada was concerned about the financial challenges that Canadians will face in 2021. Can Canadian homes withstand the storm? The answer lies with:

household financial health as of February 2020;
the effectiveness of the Canadian Government’s recovery support measures and policy activities; and
the pace of the labour market’s recovery.

As the economy recovers, the Bank of Canada looks at a variety of household debt factors. Those with greater financial vulnerability are of particular concern. Some factors that will cause concern among the Bank of Canada are:

The homeowners with few financial safeguards.
Although it does provide a financial reserve, home equity lines of credit are also associated with increased borrowing.
Will the government’s fiscal policy help support Canadians until incomes recover to pre-pandemic levels or exceed them?
In some cases, unemployment rates may not be a reliable indicator of household revenue losses.

We have entered the first quarter of 2022, so let’s see how the economy and Canadians fared in 2021.

Statistics Canada says household debt-to-income ratio hit a record high in Q4

In the fourth quarter of 2021, household disposable income declined as housing prices, housing costs, and mortgage borrowing rose, according to Statistics Canada. As a percentage of disposable income, financial markets saw that household credit market debt rose to 186.2 percent in the fourth quarter, up from 180.4 percent in the third quarter. Credit market debt accounted for $1.86 of household disposable income for every dollar of disposable income.

Consumer credit market debt rose by 1.9 percent in the fourth quarter, while consumer disposable income decreased by 1.3 percent. Household debt increased by $50.0 billion seasonally adjusted in the fourth quarter. A total of $46.3 billion was attributed to mortgages, while $3.7 billion was attributed to non-mortgage loans.

Household debt service ratios increased in the 2021 4th quarter, measured as total obligated payments of principal and interest on credit market debt as a percentage of disposable income. The ratio stood at 184.7 percent in the third quarter of 2018, and the previous record high was 181.1 percent in the fourth quarter of 2019.

Canada household-debt-to-income ratio summary

I hope you enjoyed this household debt-to-income ratio Brandon Blog post. Are you worried because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option? Call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of bankruptcy.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of these seems familiar to you and you are serious about getting the solution you need, contact the Ira Smith Trustee & Receiver Inc. group today Call us now for a no-cost consultation We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.

We hope that you and your family are remaining safe, healthy and secure during this current pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Brandon Blog Post

EXPENSIVE REAL ESTATE MARKET IN TORONTO MAY SLOW DOWN SAFELY DUE TO HOMEBUYER’S GRIDLOCK

Post author By Brandon Smith
Post date July 5, 2021

real estate market in Toronto

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

If you would prefer to listen to the audio version of this Brandon Blog, please scroll to the very bottom and click play on the podcast.

Real estate market in Toronto introduction

Over the last few years, a lot has been written about the red hot real estate market in Toronto and Vancouver. Not even the COVID-19 pandemic has been able to slow them down. Many have predicted that the real estate market in Toronto is a dangerous bubble about to burst.

There is always a need for housing in Toronto. COVID-19 with the Ontario lockdowns and stay-at-home orders has created much change but has not slowed down the real estate market in Toronto. Many people are moving to the suburbs to get more space now that they have been working and living in their homes 24/7. As a result of travel bans, immigration into Canada has temporarily slowed down immigrants still moving to Toronto.

I recently read two articles that are about totally different aspects affecting the real estate market in Toronto. However, when I put these two very different ideas together, it leads me to the conclusion that natural economic forces may be enough to slow down the market for now without any government intervention.

Real estate market in Toronto: Canadians piled on mortgage debt during COVID-19

In my June 9, 2021, Brandon Blog, IS MORTGAGE DEBT NOW THE OBSESSION FOR MANY CANADIANS? I wrote about the mortgage debt surge and its effect on the overall rise in Canadian consumer debt according to Equifax Canada.

An article published in the Toronto Star on June 30, 2021, looked at Canadians who piled on mortgage debt during COVID-19 and how some economists fear a significant correction in the market. The thrust of the article is about:

the upward pressure on the average price of a home because of bidding wars;
how first-time buyers are being squeezed out of the real estate market in Toronto given the rise in the average home price/average selling price of a home in the GTA;
both first-time homebuyers and homeowners in urban centres looking to move farther out and even into the country both for affordability and to get more space since they plan to make working from home a permanent feature in their life;
how people have maxed themselves out on mortgage debt and how an increase in interest rates may cause financial problems for those homeowners and ultimately a significant correction in the housing markets and a drastic drop in housing prices.
real estate market in Toronto

US interest rates

The US Federal Reserve recently announced that based on its expectations for rising inflation this year, it has advanced the timeline for interest rate hikes. However, the Fed offered no indication as to when it will begin reducing its aggressive bond-buying program. Fed Chairman Jerome Powell acknowledged that the topic was reviewed at a recent Fed meeting.

Advancing the time frame for raising the rate of interest is all relative. The policymaking Federal Open Market Committee left its benchmark short-term borrowing rate at near zero. Yet officials indicated that rate increases won’t come until 2023, after saying last March, it saw no increases until at the very least 2024. So interest rates in the US are anticipated to stay very low for the foreseeable future. So if the US Fed is not increasing interest rates any time soon, mortgage rates should not be either.

Canadian interest rates

At its June 9, 2021 conference, the Bank of Canada held its target for the overnight rate of 1/4 percent, with the Bank Rate at 1/2 percent and the deposit rate at 1/4 percent. The Bank is maintaining its present expectations for the overnight rate. This is strengthened and also supplemented by the Bank’s quantitative easing program, which continues at a target pace of $3 billion each week.

With vaccinations proceeding at a quicker pace and provincial constraints easing over the summertime, the Canadian economy is anticipated to rebound strongly, led by consumer spending. Real estate market activity is expected to moderate yet stay very active. Solid developments in global demand and higher prices for commodities ought to bring about a strong recovery in exports and business investment.

The real estate market in Toronto and interest rates

Therefore, it seems that there will not be upward pressure on interest rates, and therefore probably not on mortgage rates either, soon. Both the US Fed and the Bank of Canada do not seem to be in any hurry to increase interest rates.

Another factor in Canada is the newer mortgage stress test. This newer stress test was created to ensure that borrowers can meet a more stringent economic test to qualify for a home mortgage. Effective June 1 of this year, the newer test requires borrowers to qualify at the higher of an annual rate of interest of either 5.25 percent or 2 percent over the current published home mortgage market rate they can get.

This makes it harder for some to qualify for a home mortgage. The federal government hopes this will lead to lowering the pool of qualified borrowers and therefore at some point, decreasing house prices.

Both the US and Canadian governments seem happy to not try to battle inflation through increased interest rates. Coming out of the pandemic, both countries will welcome their economies bouncing back and growing. Inflation will be a natural by-product of the resurgent economies. Higher prices will mean that employers will have to increase minimum wages if they wish to attract employees to handle business growth. A higher minimum wage without any government intervention of new legislation because of inflationary pressures will be a dream come true, especially in the United States. In Canada, it is always good to head into an election while there is good economic growth.

Given all of the above, I don’t see that the real estate market in Toronto being affected by increased mortgage rates, because, there won’t be an increase in 2021 and possibly not even in 2022. So I don’t see higher interest rates being a factor at all in causing downward pressure on house prices, especially in Canada’s largest city.

Real estate market in Toronto: Homebuyer’s gridlock

The second article deals with homebuyer’s gridlock. How does this relate to the real estate market in Toronto? We have seen that people staying in their homes 24/7 during the coronavirus pandemic has allowed them to reevaluate their long-term housing needs and lifestyle choices. This has kept the Canadian real estate market strong as people see what they like and what they don’t like in their current homes. They want to get more of what they like and want, put their home up for sale and buy that home they feel will suit their needs better.

Other than for perhaps empty-nesters, those making the move are generally buying larger homes. The normal progression is that immigrants coming into Canada, which has been reduced during the pandemic, generally start as renters in Canada’s biggest cities. The dream of all renters is to become first-time homebuyers.

Prospective homebuyers start looking for their starter home. It could be a condominium, a townhouse or semi-detached or detached house. They end up buying from someone who is selling their first home. That person now looks for a larger purchase in the mid-tier. They buy from someone looking to go up into a much larger and perhaps their dream luxury home. Ultimately, the empty-nester luxury home dweller looks to downsize and more than likely will be looking to buy in the condo market. All this market activity fuels the Canadian housing market activity keeping real estate prices strong and strong demand for all types of housing.

Zillow Canada commissioned a new study from Ipsos Reid. Buried among the usual analyses on things like affordability was an unusual item. Home prices across Canada have increased so much, lots of property owners can’t afford to sell. A quarter of house owners all set to sell have not listed, since they can’t afford their next move. This is what a homebuyer’s gridlock is. People are “locked” into their circumstances. It only happens throughout the frothiest of markets, which we are apparently in.

But what happens to market activity if one or more of these different buyer types cannot afford that next move? It means that there will not be as many sellers at different levels of homes. If the number of buyers does not decrease in ratio to the decrease in sellers, this will cause bidding wars and upward pressure on prices.

To determine if there is going to be downward or upward pressure, we have to know the supply and demand statistics for each level of housing. One thing for sure though, if the number of buyers decreases, this means less demand. Less demand means that prices would not increase. They may not drop dramatically, but they certainly will not increase either.

Real estate market in Toronto summary

With borrowing costs remaining low, the mortgage stress test making sure that borrowers can afford their mortgage at higher interest rates and now many would-be sellers not able to afford that next move up, I don’t agree with those market watchers who are predicting a huge real estate market in Toronto bubble about to burst.

Rather, I see market conditions remaining relatively stable, with perhaps less volume of activity than we have seen over the last couple of years. Average house prices may go down, but I don’t believe it is going to be a huge drop. Rather, I think the real estate market in Toronto may take a bit of a rest, until the next round of price appreciation. Ultimately, population growth in and around the GTA should fuel a new cycle of pent-up demand that will create new demand for ownership housing in Canada’s major cities.

I hope that you found this real estate market in Toronto Brandon Blog interesting. Problems can arise when there are increases in the prices of the goods and services that you need when you already have too much consumer debt.

If you are concerned because you or your business are dealing with substantial debt challenges, whether you need gambling debt help or just plain old debt help and you assume bankruptcy is your only option, call me.

It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.

The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties with debt relief options as alternatives to bankruptcy. We can get you the relief you need and so deserve. Our professional advice will create for you a personalized debt-free plan for you or your company during our no-cost initial consultation.

The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.

We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do as we know the alternatives to bankruptcy. We help many people and companies stay clear of filing an assignment in bankruptcy.

That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of these seems familiar to you and you are serious about getting the solution you need to become debt-free, contact the Ira Smith Trustee & Receiver Inc. group today.

Call us now for a no-cost bankruptcy consultation.

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

Brandon Blog Post

SUBPRIME LENDER RESORTS TO BORROWING AT SUBPRIME: CANADIAN MORTGAGE RATES TO MOVE HIGHER?

Post author By Brandon Smith
Post date June 12, 2017

Subprime lender: Introduction

Toronto’s real estate market has changed in May 2017. Many more listings have come onto the market and the Canadian subprime lender mortgage landscape has changed. The regulations for qualifying for a traditional mortgage have tightened significantly. Canadians in ever-increasing numbers have turned to alternative mortgage lenders or subprime lenders. For a higher interest rate subprime lenders give mortgages to people who are higher risk and don’t meet the criteria demanded by traditional financial institutions.

Subprime lender: Now the subprime lender is in trouble

The problems started in July 2015 when Home Capital Group disclosed it had cut ties with 45 mortgage brokers. An internal investigation revealed that certain borrower applications contained false income and employment information to get loans. The Ontario Securities Commission (OSC) alleges that the company broke securities law by making misleading disclosure after the company believed it discovered some brokers had falsified loan applications. All hell broke loose!

Subprime lender: No Capital = No Mortgages = No Business

Alternative mortgage lender Home Capital Group is now in big trouble. Its stock dropped 60% in a single day. A run on deposits have taken them into a deep dive to $391 million from $2 billion. Home Capital’s ability to attract new funding is now seriously in doubt.

Subprime lender: The subprime lender resorts to borrowing at subprime

Home Capital Group has taken out a $2 billion loan from the Healthcare of Ontario Pension Plan. With a 10% interest rate plus other fees and charges, the company is effectively paying 22.5% on the first $1 billion it borrows. This falls to 15% if it uses the full $2 billion available to it, according to Jaeme Gloyn, an analyst at National Bank of Canada. The subprime lender has borrowed at subprime rates so in effect the predator has become the prey!

Subprime lender: How can a subprime lender’s troubles affect you?

Home Capital’s problems have tainted the entire subprime mortgage lending in Canada industry. Stocks of other subprime lenders have also dropped. “Home Capital contagion has spread to the entire mortgage market, in particular, alternative mortgage lenders,” says National Bank of Canada analysts Jaeme Gloyn and Victor Dri.

Home Capital Group won’t be able to continue to fund at the same volume as they have in the past. This means that mortgage brokers and borrowers will approach other subprime lenders. This demand will probably lead to subprime lenders charging even higher interest rates, making mortgages unaffordable to many Canadians. 3bestaward

Subprime lender: What does this mean for the Toronto real estate market?

If fewer people can get mortgages then the entire real estate market is going to feel the crunch. The Canadian financial services industry is much different from that in the USA. Although no one wants to set off alarm bells, what happened to Home Capital Group sounds all too reminiscent of the New Century Bank story in 2007 in the U.S. They too faced a liquidity crunch which eventually left them with no alternative but to declare bankruptcy – a move which set off the 2007-2008 financial crisis.

Is the subprime lender borrowing at subprime rates a warning? We are already seeing the Toronto real estate market slowing. It now resembles a very active market, but not the overheated market of the past year or so. Will it slow down more? Is the Toronto real estate market still a bubble about to burst? Only time will tell.

Subprime lender: Have you borrowed all you can borrow but still need more money to make ends meet?

Buying more house than you can afford is never a good idea. If you’ve bought more house than you can afford or are experiencing serious debt issues for any reason, the Ira Smith Team is here to help. We’re experts in debt, serving companies and people throughout the Greater Toronto Area (GTA) facing financial crisis or bankruptcy that need a plan for Starting Over, Starting Now. Give us a call today.

Tags alternative mortgage lenders, canadian mortgage rates, canadian subprime lender, GTA, Home Capital Group, Ira Smith Trustee, mortgage rates, New Century Bank, subprime lender, subprime lenders, subprime lending industry, subprime mortgage lending in canada, subprime rates, toronto real estate, toronto real estate market, toronto real estate market crash

Brandon Blog Post

FINANCIAL CRISIS IN CANADA: CAN REAL ESTATE PRICES TRIGGER ONE?

Post author By Brandon Smith
Post date May 13, 2014

In 2007 Canadians watched as the real estate bubble burst in the United States; can a financial crisis in Canada be triggered this way? We believed then and continue to believe now that a financial crisis in Canada can’t happen because Canada enjoys an extremely well regulated financial system. But, should we really be secure in this belief or will rising real estate prices trigger a financial crisis in Canada? Many analysts are concerned and for good reason:

7.5% of the Canadian workforce is in the construction industry, while 7% of the Canadian economy is based on residential construction – both record highs
The unemployment rate rose from 6.9% to 7.2%
The Canadian debt-to-income ratio has soared to a record 164%, above levels experienced in the U.S. before the financial crisis

A housing bust could potentially lead to an increase in unemployment which could trigger a financial crisis in Canada. The Canadian Bankers Association reports that 70% of all household debt in Canada is made up of residential mortgage debt. According to Amna Asaf, an economist with the macro research firm Capital Economics, “Even a modest uptick in mortgage rates will translate into much higher homeownership costs, easily outpacing any expected increase in household incomes. This will price out some prospective home buyers, reinforcing the drop back in existing home sales that is already under way.” This is the same dynamic that triggered the bust of the U.S. real estate bubble in 2007. Although Canada’s strict housing regulations will likely cushion the blow to a degree, it doesn’t grant us immunity from a financial crisis in Canada.

There is a growing belief that housing is an investment that can only increase in value, which of course is fueled by a plethora of free real estate seminars and television shows dedicated to showing you how to make money with real estate – flipping properties, income properties, etc. However, making money with these types of ventures is predicated on the myth that the housing market won’t suffer a decline in value. Either a soft real estate market, or worse, a financial crisis in Canada, when you are ready to sell your house, will produce declining values of varying degrees.

Have you gotten in over your head in the housing market to the point where you could not come up with $2000 in an emergency? Ira Smith Trustee & Receiver Inc. can help with your serious debt issues. Contact us today for a consultation. We approach every file with the attitude that corporate or personal financial problems can be solved given immediate action and the right plan. Starting Over, Starting Now you can take the first step towards living a debt free life.

Tags Debt, household debt, housing market, mortgage rates, real estate, real estate bubble, real estate seminars, residential mortgage debt