“While higher rates represent a financial challenge for many households and will likely see consumers cut back on discretionary spending, we are not concerned about a significant rise in mortgage defaults at this stage,” Cacho writes.Īnother factor working in the banks’ favour is that they still have multibillion-dollar “rainy day funds” from the COVID-19 pandemic. and December 2010, and another 8.2 million foreclosures were initiated dur-. Senate Republicans unveiled follow-up legislation this week to the Coronavirus Aid, Economic Relief and Security Act that would cut the enhanced unemployment benefits to 200 per week through September, down from 600. Some expect a massive default wave valued at hundreds of billions of USD, and a subprime-like crisis in China. And right now, the unemployment rate is at its lowest level in decades, at 3.9 per cent. Based on the banks’ announcements, the related non-performing assets account for just 0.001 to 0.01 of their mortgage loans (Mortgage is typically 20-40 of the toal loan portfolio). He acknowledges this would be a “material” cut, but it is one reason why he does not expect a big jump in mortgage defaults.īankers also say that what matters most for whether people can afford to pay their mortgage is having a job. The idea was made famous in a landmark 2019 Federal Court ruling that found borrowers could always cut back on “ Wagyu and shiraz” if times got tough.Ĭacho cites estimates that a typical family of four has annual consumption of about $81,000, but says the HEM suggests such a household could get by spending a much lesser $51,000. Mortgages grew seven per cent from last year, down from eight per cent growth year over year last quarter, RBC chief executive Dave Mckay said in a May 25 conference call. He says repayments for this group could jump to as high as 50 per cent of their income, and many would ultimately “struggle.” Even so, he is not overly worried about sharply increasing mortgage defaults.Ĭacho points out that when banks approve a loan, they assume that, if necessary, the borrower could cut their spending to a bare minimum, captured by a statistical tool called the Household Expenditure Measure (HEM). Its expected 725 million loan default appears to be the largest U.S. The Royal Bank of Canada was one of the banks warning that the days of unrelenting mortgage volume growth are ebbing. While major hurricanes with the potential to cause severe economic damage and a wave of mortgage defaults is not a new phenomenon, climate change is. Jarden chief economist Carlos Cacho has crunched the numbers on how the borrowers most heavily in debt – more than six times their annual income – would fare if official interest rates rose from the current 0.85 per cent to 2.5 per cent, as many analysts expect they could. As household budgets face a squeeze from higher inflation and rising interest rates, the Reserve Bank has tried to calm the market’s nerves by pointing out that “the average customer” is well ahead on their mortgage repayments, and that households have stockpiled more than $250 billion in savings.Īll true, but it’s not the “average customer” that the market worries about, it is borrowers who are deemed riskier, such as those with big debts or irregular incomes.

Next wave of mortgage defaults