Bracing for impact.
It’s been over a year of back and forth on whether or not there is a recession in the cards for Canada. There have been multiple ebbs and flows in the wake of high inflation, rate hikes, bank collapses and high GDP but, even this far into the discussion, Canadians don’t seem to have a clear direction on what we can expect.
Whether Canada sinks into a full-scale recession remains to be seen, but whether you should prepare yourself for a potentially hard economic landing (whenever it may come) is a sure thing.
Are we headed for disaster?
Canadians have been told to brace for a recession for so long without much proof that, if GDP is any indication, it appears most of us have continued living (and spending) as if nothing has changed at all. Financial fears subsided somewhat earlier this spring as consumer confidence increased in response to relative calm on the rate front, and real estate markets gained some springtime momentum. At the same time, although not ideal from an inflationary perspective, an economy that remained surprisingly strong through it all has built a stronger case for avoiding the recession we’ve been taunted with for so long.
But then, along came the Bank of Canada to throw down the gauntlet on stubborn inflation and hit us with a ninth increase to its overnight rate - bringing us to an unprecedented high of 4.75% and prime rate to 6.95%. And while we knew another increase was all but guaranteed as inflation numbers brought up solid in April, nobody really expected it to be this soon. We also didn’t really expect the change in language that the Bank used to imply that this may not be the last, or even second-to-last increase of this cycle.
As we know, the overnight rate is really the only tool the BoC has to get inflation back to the target of 2%, and in the face of a stronger-than-expected economy, it’s really no surprise that they are digging in this deep. But of course, with a higher cost of borrowing comes a higher risk of a true recession, potential job loss, and even potential financial disaster for homeowners. So does that mean that we should batten down the hatches and brace ourselves for catastrophe? Not necessarily. As is so often the case, Canadian economists are split on what the outcome of this rate hike cycle will be. Some, such as Dejardin’s Jimmy Dean, expect that while we will enter what he calls a “light recession,” the damage should be minimal thanks to “explosive” immigration fuelling unprecedented economic growth. Others, including Manulife’s Frances Donald, fear that the impact of the BoC’s rate hikes might do the trick when it comes to tamping inflation but could have painful consequences for the Canadian public.
In reality, none of us can truly predict what will happen next. All eyes are on May’s inflation report, due later this month, but we won’t really know what’s in store until rate hikes catch up with consumer behaviour, and by then, it might be too late. So rather than dwelling on the “what ifs” and continuing with the status quo, the best thing we can do right now is prepare ourselves and our finances for any potential scenario - even the worst case.
Buckling down without spinning out
Listen - we know that it is never fun to talk about budgeting, but it is especially not fun as we head into the season of road trips and patios. The last thing we want to be doing right now is thinking about money, but if we don’t do it now, we will almost certainly be paying for it later.
As we know, Canadian debt is at an all-time high. We currently carry more debt than any other G7 citizens, and household debt makes up about 107% of GDP - not great. Of this, roughly 3/4 is mortgage debt. Does this mean that we should all be selling our homes and heading for the hills? No. But it does mean that we are vulnerable to economic slowdown and should be putting the framework in place to protect ourselves now. How?
If you are one of the thousands of Canadian homeowners still in a variable rate mortgage, now is a good time to consider locking into a shorter-term fixed rate mortgage. This will ensure that your payment stays consistent for a 2, 3 or 4-year term and will shield you from further increases over that time. It will also give you the flexibility of switching to a lower rate sooner without breaking your term early and potentially incurring penalties to do so.
If you are currently in a fixed-rate mortgage and have a renewal coming up in the next year or two, consider taking advantage of your prepayment privileges now. Most lenders will allow you to incrementally increase your payments to prepay your principal by about 15% annually. Of course, cash flow is tight for most of us right now. But increasing your monthly payment now will help to prevent some of the payment shock you may experience when renewal rolls around, and you are left with a much higher rate than you’re currently enjoying.
Cash flow is everything
No matter what is happening in the economy, maximizing our cash flow is always the ultimate goal. That is, streamlining our payments and minimizing our monthly obligations to ensure that we can carry the maximum cash possible into the next month. Being completely tapped out at the end of a billing cycle is stressful and can leave us extremely vulnerable should we experience a harder recessionary landing.
We can do this through all the usual suspects - cutting back on unnecessary spending, cancelling memberships, negotiating bills and following a budget. These things are all the backbone of a strong financial plan regardless of the economic climate. But if you are carrying high consumer debt in the form of credit cards, unsecured lines of credit or consumer loans (hello, car payments), then making your coffee at home and cancelling Disney+ won’t make a dent worth calling home about. Instead, consider making your mortgage work for you and rolling your repayments into one monthly payment. And before you ask - yes, consolidation often even works in a higher-rate environment. You’ll just have to run the numbers on your effective interest rate to see if it’s worth it.
We’ve talked about the above effective rate calculator before, so you may be familiar. But, as a refresher, your effective rate illustrates the average interest rate you are paying between all of your debts as well as the borrowing power you have with the equity in your home. In other words, does all of the interest you are paying between your credit cards, loans and mortgage add up to more than what it would be should you roll everything into your mortgage at a higher rate?
In many cases, the answer to this question is a resounding “yes!” Even as rates have been climbing back up, we’ve helped plenty of homeowners save $1000 or more every month, and tens of thousands in the long run, by rolling everything into one neat monthly payment. Click the button above and make yourself a copy of our calculator spreadsheet - you may be surprised by what you find! And it can be overwhelming, so please reach out for guidance working through the numbers. We’re here for you!
Of course, the real trick is to change your spending habits once the consolidation is completed to avoid getting yourself back into the same situation again. But we can help you with that as well!
Will we make it out the other side?
In short, yes. We will make it out the other side of this. Whether we experience a hard landing into a true recession or more of a recession light, it’s important to remember that Canadians have weathered things like this before and will again - but the common denominator of those who come out on the other side thriving is a plan.
You don’t have to batten down the hatches and run for the hills, but you do have to take a hard look at your finances to see where your money is going, how you can maximize it, and how you can protect it should the worst-case arise. And the good news? You don’t have to do it alone. Our team is passionate about making your cash flow work and protecting you no matter what happens!
