Consider Refinancing or Debt Consolidation in Light of Bank of Canada Comments
In its semi-annual Financial System Review, released June 21st, the Bank of Canada remarked on the stability of Canada’s banking system and prospects for our economy. This, in the wake of the recent strains on the global financial system in May – strains highlighted by the sovereign debt crisis in Greece and other weaker members of the European Union.
While overall, the Bank of Canada’s governors conclude that Canada’s financial system “has continued to function well, and indeed, has strengthened further” since its last Financial System Review in December, 2009. The governors nonetheless highlighted the positive and negative implications of the rapid growth of Canadian credit throughout the most recent financial crisis. Homeowners who are looking at refinancing their mortgages or considering debt consolidation might take into consideration the Bank’s comments – comments which displayed both a guarded optimism and a wary caution about the level of consumer debt in Canada.
On the one hand, the Bank notes that the “rapid growth of household credit throughout the crisis is a testament both to the resilience of Canada’s financial system and economy and to the effectiveness of the domestic and global policy stimulus.” On the other hand, the Bank governors surmise that in the event of an economic downturn Canadian households could be vulnerable to banks tightening their credit conditions.
Noting that the recent rapid growth of household credit could be “an important source of risk”, the Bank governors conclude that “the proportion of Canadian households that are judged to be vulnerable to adverse wealth and income shocks has increased in recent years with the steady rise in aggregate household debt in relation to income.” “In the event of a significant economic downturn,” they note, “the credit quality of household loan portfolios could be undermined, prompting banks to tighten credit conditions and some households to reduce spending.”
In wake of such comments, it may be prudent for savvy borrowers to take advantage of our current low interest rates to consolidate debt and/or refinance mortgages while lending rates remain low. The Bank of Canada will next reassess its benchmark overnight lending rate at its meeting on July 20th.
