Canadian household debt improved in the first half of 2020 as government support kept incomes afloat amid the pandemic.

Household debt in the credit market fell to 158.2 percent of disposable income in the second quarter, from 175.4 percent previously, Statistics Canada reported in Ottawa on Friday. This is due to an 11% increase in household disposable income, while outstanding debt in the credit market has remained relatively unchanged, the agency said.

Government income transfers during COVID-19 and mortgage deferrals, along with record interest rates, have brought financial relief to many Canadians during the pandemic, especially those who lost their jobs during the pandemic. nationwide business closures and stay-at-home orders.

Economists, however, don’t expect this to last.

“More difficult times are likely to come,” Ksenia Bushmeneva, economist at the Toronto-Dominion Bank, said in an investor report. “These support measures will gradually start to fade, and the state of the labor market and consumer finances cannot diverge indefinitely.”

A major concern is that with a full economic recovery still a long way off and the government of Prime Minister Justin Trudeau ending support measures, some households will find it difficult to keep up with their payments. Consumer defaults and insolvencies will likely start to increase at the end of this year and into 2021, Bushmeneva said.

But for now, government income support is helping the economy come out of the most severe downturn on record and allowing Canadians to pay down their debts and increase their savings.

In the second quarter, the household debt service ratio, the share of disposable income that goes to pay principal and interest, fell to 12.4% from 14.5%. This is the biggest drop on record.

–With help from Erik Hertzberg.

The Reserve Bank of India (RBI) said on Friday that some actions taken by financial sector regulators and the Center to mitigate the impact of the Covid-19 pandemic had successfully alleviated operational constraints and helped maintain integrity and market resilience in the face of severe risk aversion. Simultaneously, the central bank also warned of bad debts from Indian lenders which would rise sharply to 12.5% ​​of outstanding loans by March of next year.

The umbrella bank in the 21st issue of its Financial Stability Report indicated that a combination of fiscal, monetary and regulatory interventions of unprecedented magnitude with government assistance had ensured the normal functioning of the country’s financial markets. despite a bleak economic outlook earlier this year. .

“In a changing environment, when risk management must be prudent, extreme risk aversion would have negative consequences for all,” said RBI Governor Shaktikanta Das in his foreword to the semi-annual stability report Financial (FSR) released on Friday. The top priority right now for all banks and finance companies should be to increase capital levels and improve resilience, the RBI governor said.

“The over-leveraged non-financial sector, latent global geopolitical tensions and economic losses from the Covid-19 pandemic are major risks to the global economic outlook,” the Reserve Bank of India report said.

Among Indian lenders ranging from ICICI bank to besieged Yes Bank, announcing plans to raise funds by selling shares to raise capital, apex bank said, bad debts of Indian banks are expected to rise to 12, 5% of outstanding credit by March 2021. The RBI cited the prolonged nationwide foreclosure, which had hurt trade and left thousands of people unemployed in the country as potential causes of bad debts that are expected to increase in Indian banks.

The country’s bad debt rate was already one of the highest among the world’s major economies at 8.5% at the end of March 2020. If the macroeconomic environment deteriorates later this year, the ratio could climb to 14%. , 7% under the severely stressed economic scenario, the RBI said in its report.

Right now, a moratorium on loan repayments for businesses and individuals provides some relief for struggling businesses, but lenders could see a wave of loans turn into bad debts after this relief ends in August. warned the RBI.

A website that tracks developments in the mortgage market has published surprising findings about a new policy announced by the Canada Mortgage and Housing Corporation.

On Thursday, the federal housing agency said it expects housing prices in Canada to drop 9 to 18% over the next year.

As a result, CMHC will be changing its underwriting policies for insured mortgages effective July 1.

Among the new measures, a mortgage borrower must establish a minimum score of 680. In addition, non-traditional sources of down payment that increase debt will not be treated as equity for mortgage insurance purposes.

New applicants will need a gross-to-total debt service ratio of 35/42. (The GDS ratio measures the percentage of income to pay off all monthly housing costs. The TDS ratio includes all of this, plus other debt securities, as a percentage of income.)

According to the RateSpy.com website, these new rules will reduce the purchasing power of homebuyers by up to 11%.

“For example, someone earning $ 60,000 with no further debt and 5% less could afford about 10.9% less for their home under the new CMHC rules,” the website says. “It’s like dropping the minimum stress test rate from 4.94% (where it stands today) to 6.30%!”

He notes that insured borrowers only make up about 20 percent of new mortgages. This is because lenders require mortgage insurance if the down payment is less than 20% of the purchase price.

RateSpy.com also suggests that CMHC could lose 20 percent of its mortgage insurance business due to the policy change.

“Liquidity is key if home values ​​plunge,” the website says. “Yet CMHC’s decision today could shift more of its business outside of large urban areas and to less urban and less liquid real estate markets.

“This is because borrowers in Greater Toronto and Vancouver typically have higher debt ratios⁠ and borrowers with higher debt ratios and less than 20% down payments would choose Canada Guaranty or Genworth by default. , because these are the only games left in town. “

CMHC has also suspended the refinancing of mortgage loan insurance for multi-family housing, except when these funds are used to repair the building or to reinvest in the housing.

“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic future of Canadians,” CMHC President and CEO Evan Siddall said on June 4 . “These measures will protect homebuyers, reduce government and taxpayer risk, and support stable housing markets while reducing excess demand and unsustainable growth in house prices.” “

Last month, Siddall tweeted that he saw the value in doubling the minimum down payments in Canada from 5% to 10%.

https://twitter.com/ewsiddall/status/1264274395964596224?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1264274395964596224&ref_url=https%3A%2stra%2Fight.com -deserves-to-double-house-minimum-installments-of-five-to-10

Jamaica’s ratio of outstanding public debt to gross domestic product (GDP) fell to 120.2% in March this year, better than the 125.1% forecast under the program. economic support with the International Monetary Fund (IMF), according to data from the Ministry of Finance and Civil Service.

This is also a considerable improvement from 136.6% at the end of March 2015, reported Friday Richard Byles, co-chair of the Economic Program Oversight Committee (EPOC).

“So that puts us in a pretty strong position to continue reducing the debt-to-GDP ratio in the future,” Byles said during a press briefing at Sagicor Life, New Kingston, where he issued the 39th release. the non-public sectoral members of EPOC.

The March 2016 debt-to-GDP ratio result was negatively influenced by the depreciation of the Jamaican dollar against the US dollar, which had an impact on debt as 75% is denominated in foreign currencies, a t -he declares.

It was also negatively influenced by an inflation rate of -1.3% in the January-March quarter, which would have reduced the size of nominal GDP, the EPOC co-chair said.

Byles said the positive side outweighed the negative influences was the PetroCaribe transaction, which reduced the debt-to-GDP ratio by about 10 percent.

However, “we cannot become complacent about this debt-to-GDP ratio target” because “120%, as improved as it is for us in Jamaica, is double the level that economists say countries should not overshoot, ”he said. added.

Byles also reported that for the quarter through June, government spending was $ 122.7 billion, 8.1 percent lower than expected.

Recurring spending was $ 7.2 billion or 8.1 percent below budget, while capital spending was $ 3.7 billion or 27.5 percent below budget.

Combined with tax revenues, which stood at $ 108.3 billion against a target of $ 100.5 billion, it produced a primary surplus of $ 26.8 billion, or 15.8 billion more than the target of $ 11 billion.

However, Byles noted that, as was the case in the two months leading up to June, the under-spending was largely due to the late approval of the 2016/17 budget, but “I expect that. that during the year we were catching up with the budget on the expenditure side.

On the other hand, according to the statement, the tax package announced by the government has been implemented and when the data for July is released, “we expect to see the impact of the increase in the tax threshold on the income of natural persons on PAYE (pay-as -you-earn) taxes. “

Byles said there would likely be a decrease of $ 1.3 billion per month in PAYE collections due to the tax threshold adjustment.

Net international reserves at the end of the quarter stood at US $ 2.28 billion, against an IMF target of US $ 1.81 billion.

Data released by the Jamaica Institute of Statistics shows inflation for June was 0.9%, “the highest we’ve had since July of last year,” Byles said.

Inflation was largely driven by electricity, up 4%, and transportation, up 2.1%.

He said the upward movement in electricity and transportation was mainly due to global oil prices which increased during the quarter, the special consumption tax (SCT) which was imposed on heavy fuel oil. intended for the Jamaican utility and CTS of $ 7 per liter that was put on fuel.

“That’s a pretty high number,” Byles said of the inflation rate, noting that the inflation rate since the start of the calendar year is 0.6% negative and the 12-month rolling rate. 2.5%.

Preliminary balance of payments data from the Bank of Jamaica shows that the current account deficit recorded a surplus of US $ 44.5 million for the quarter ended March 2016.

The result reflects a significant improvement of US $ 104.7 million over the corresponding quarter of 2015 and is largely attributable to a higher US $ 55.8 million surplus from tourism. In the goods sub-account, the deficit narrowed by US $ 30.9 million, largely due to lower imports, reflecting lower spending on fuel and some consumer goods.

Byles said that despite the stable fundamentals of the economy, Jamaica still faces challenges.

Among these is the need to embark on this aspect of the public sector transformation agenda in order to reduce the current ratio of wages to GDP from 10.3% to 9% by 2018/19.

Byles said it would result in annual savings of $ 20 billion, which is absolutely necessary for infrastructure investments.

Another challenge is to finance the further reduction of the personal income tax threshold, which is expected to cost the government an additional $ 16 billion as of April 2017, “without disrupting the generation of primary balance surpluses and without introducing draconian tax measures that harm business confidence. or impact too much on consumer confidence and purchasing power, ”he said.

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If you’re a typical borrower, your debt ratio will largely determine whether you’re approved for a mortgage.

For applicants pushing the boundaries of qualification, these approvals have been more difficult to obtain. This is a direct result of the tightening of mortgage rules last year, which imposed more stringent calculations of the debt-to-equity ratio (among other things).

And by the end of the year, those calculations will become even more conservative.

On June 27, CMHC released new guidelines for calculating debt ratios and confirming income documents.

“In current practice, CMHC stipulates standard formulas for calculating debt service ratios, but has not specified how each the key input must be addressed, ”said CMHC spokesperson Charles Sauriol.

These new guidelines will clarify that, and will come into effect on CMHC-insured mortgages on December 31, 2013. (In practice, many lenders already apply them.)

These standards will apply to all insured residential mortgages of 1 to 4 units, regardless of the loan-to-value ratio. Uninsured (conventional) mortgages are allowed in different policies, but most lenders will use the same rules for all of their approvals.

Here are some of the new “clarifications” regarding CMHC insured mortgages:

• For variable income: Lenders should use “an amount not exceeding the average income for the past two years”. The variable refers to things like bonuses, tips, seasonal jobs, and investment income.
• For rental income: If a borrower owns other rental properties not occupied by the owner, the principal, interest, property taxes and heating (PITH) on these properties must be:
  • deducted from gross rental income to establish net rental income; or
  • included in “other debt securities” when calculating the total debt service ratio (TDS).
• For the income of the guarantor: A guarantor’s income should not be used in GDS / TDS ratios “unless the guarantor… occupies the home and is the borrower’s spouse or common-law partner”.
• Unsecured lines of credit and credit cards: For these debts, “Not less than 3% of the outstanding balance” should be included in the monthly debt payments. Interest-only payments are no longer taken into account on lines of credit. Additionally, lenders should assess the borrower’s credit history and borrowing behavior when determining the amount of revolving credit that should be factored into debt ratios.
• Guaranteed lines of credit: Lenders should consider “the equivalent” of a payment based on “the unpaid balance amortized over 25 years”. This payment must use the contract rate (from the LOC) or the 5-year benchmark rate (V121764) published by the Bank of Canada (if the contract rate is unknown). Again, interest-only payments are no longer allowed for the purposes of calculating the debt-to-equity ratio.
• Heating costs: Lenders are now required to obtain “actual heating cost statements” for a property. When such a history is not available, the heating expenses used in the debt-to-equity ratio calculations “should be a reasonable estimate taking into consideration factors such as property size, location and / or location. type of heating system ”. This is why some lenders have now switched to a fixed heating cost formula, like: (square foot x $ 0.75) / 12 months

Compared to previous methods (which involved fixed heating costs, like $ 100 / month), the new guidelines can double or triple the heating costs that must be factored into debt ratios on large properties and properties. reduce on the smaller ones.

It is important to reiterate that most of these policies are already followed by most lenders. But there are exceptions.

These exceptional lenders are generally seen as go-to sources when borrowers have tight debt ratios. These new guidelines are designed to minimize these “loopholes”.

This all happened, in part, because of the changes to the Ottawa rules last July. At that time, the government set the maximum gross debt service and total debt service ratios for insured mortgages at 39% and 44% respectively.

Sauriol says the change “reinforces the importance for CMHC of ensuring that debt service ratios provide the same measure of a particular borrower’s ability to service mortgage debt, regardless of the lender who submits the insurance application to CMHC ”.

Rob McLister, CMT