At the turn of every new year, Canadians start thinking about the state of their finances. And it seems that this year, a majority of us are worried about personal debt levels and a potential recession. That’s according to a new survey from CIBC.
For the 10th consecutive year, debt repayment has topped the list as Canadians’ number one financial priority, CIBC said. A full 71% of respondents say they held back on borrowing more money last year and were concerned about the rising cost of goods.
This comes as consumer debt loads reach record levels and personal delinquencies climb.
A separate study from Manulife found that two out of five Canadians don’t expect to get out of debt in their lifetime, and that 11% consider themselves “in over their head.”
It’s little wonder then that delinquencies are starting to surge, according to recent data from Equifax. The 90-day delinquency rate for mortgages rose 6.7% to 0.18% in the third quarter (still a small number but a notable increase). Meanwhile, non-mortgage debt delinquencies were up 9.7% to 1.15%.
That’s making more and more Canadians anxious to whittle down their debts.
The CIBC survey found that 78% of respondents feel it’s better to pay down debt than to build up savings. At the same time, 33% fear they’re sacrificing their future nest egg due to debt repayment.
Lingering Fear of a Recession
An economic downturn is very much on the minds of most Canadians. More than half (55%) say they’re concerned about a potential recession this year.
The threat is real given Canada’s rising unemployment and persistent inversion of its 10-year bond yield and its overnight rate, both indicators that have traditionally preceded past recessions.
Should a recession come to pass in 2020, mortgage rates would likely fall even lower than their 2019 bottom. And we’re not that far away. As we wrote recently, fixed mortgage rates ended the year about 20% lower from where they started 2019.
How to Play a Looming Recession
As our sister site, RateSpy.com, noted previously, the type of mortgage rate you should consider in the event of a recession depends heavily on your personal financial situation.
If you have a stable job and can handle the risk of slightly higher (future) interest rates, a variable rate might be worth considering. That’s “on the assumption that their historical outperformance will persist in a slowing economy,” the article noted. Just make sure it’s a variable rate under 3.00% to stack the odds further in your favour.
Anyone with less employment and income certainty, and/or an uncomfortably higher debt load, is potentially more suited to the safety of a fixed rate. That’s particularly true given that the lowest available 5-year fixed rates are selling for less than most variable rates.
“That minimizes your exposure to both higher interest costs and the risk of not qualifying to switch lenders when renewing a shorter term,” RateSpy notes.
But this advice comes with one caveat: be sure to choose a “fair-penalty” lender (i.e., one that doesn’t use artificially inflated rates to set its prepayment penalties). Reason being, if there’s a chance you’ll have to break your mortgage early, a fair penalty lender can cost you less than half as much as breaking a big bank mortgage.