Canadian households, which are some of the most indebted in the world, are looking for financial reprieve. According to the Canadian Bankers Association, there have now been nearly 500,000 mortgage deferrals completed or in the process of completing since the program was announced two weeks ago. That’s nearly 10% of all mortgages outstanding.
According to the Canada Mortgage and Housing Corporation, the average monthly mortgage payment of Canadian homeowners is $1,326. Therefore, the cash flow freed up for Canadians from the deferrals completed to date is roughly $663 million per month, or nearly $2 billion per quarter. This number will increase over the coming weeks.
Make no mistake, there is no such thing as a free lunch. Canadian banks are under pressure, despite immense support from policy makers. OSFI, the bank regulator, recently lowered the capital buffer a few weeks ago (from 2.25% to 1%) is now considering lowering the capital buffer to zero.
In simple terms, a capital buffer is mandatory capital that financial institutions are required to hold in addition to regulatory capital requirements. Consider the capital buffer like a rainy day fund for banks.
In essence, OSFI is allowing banks to draw down this “rainy day fund”
OSFI prepared to release 'some or all' of what remains of the capital buffer for the largest banks: Superintendent Rudin pic.twitter.com/a8qrehaGWr
— BNN Bloomberg (@BNNBloomberg) April 3, 2020
Not really an encouraging sign. But then again, lets be honest, the banking system wasn’t really designed for half a million Canadians to defer their mortgage payments.
It could be worse though. In other parts of the world banks are facing similar problems. In the US, Mortgage lenders are preparing for the biggest wave of delinquencies in history. As many as 30% of Americans with home loans – about 15 million households –- could stop paying if the U.S. economy remains closed through the summer or beyond, according to an estimate by Mark Zandi, chief economist for Moody’s Analytics.
In the UK, the banks persuaded the Government to suspend the country’s property market. UK banks have expressed concern about the impact of the pandemic on valuations and about granting credit when the economy is in free fall. Lloyds Banking Group and Barclays, two of the UK’s biggest lenders, are temporarily pulling many of their mortgages. Lloyds has stopped offering mortgages or remortgages through brokers unless the customer has a deposit of at least 40 per cent of the value of the property.
So far, The European Central Bank, the Bank of England and the Reserve Bank of New Zealand have all announced restrictions on plans to return capital to investors, including in the form of dividends. It sounds like Australia may be next. Over to you Canada.