Canadian Credit Crunch Looming?

With what is going on south of the border should we expect it to have a significant impact on our national economy and in turn our personal financial situation? Short answer…Yes! Does it mean doomsday as some media in the USA would have us believe? No, but it certainly is worse than was being reported a few months back and could get worse yet. The USA economy is a world leader for a reason. The health of their economy obviously has an impact on the the health of the world economy.

The reality is that the more exposure you have to the markets the more at risk you will be. The more credit you require the more you will pay to get that credit. So you will have less and having less will cost you more…make sense? Well for example with prime at 6%, the difference between a mortgage rate of 5.4% versus 5.1% could mean almost $15,000 extra in interest on an average Canadian home over 25 years (based on a 10% down payment.) Now imagine what you could have done with that 15K in an RRSP or an RESP?

We have not seen huge stop gap measures that have been happening on Wall Street but things are happening on Bay Street as well. The spread on long-term loans – the difference between Bank of Canada government bonds and mortgage rates – has been widening as the perceived risk increases. The gap is now 184 basis points compared to 115 basis points in June.

Maybe we should consider returning to a simpler time…a time when consumers saved for purchases rather than just financing them with debt. The credit culture has finally gone too far, the sense of entitlement and “need” for more stuff now has repercussions that are being realized. If you cannot afford to own something you should not own it. The banking industry in the U.S. took advantage of a push to have more accessible financing terms available to people who could not afford to have what they were buying. In a lot of ways they preyed on the ignorant and uninformed.

I spoke with a regional director with Wells Fargo and we discussed what had gone wrong in the US. He also explained in very simple terms why Wells Fargo is not being hurt by what is going on, “We simply did not take on those high risk mortgages”. He also talked about the clients they prefer, they don’t feel the need to push for more business and reach into markets that will cause them problems if any number of “worst case” scenarios happen. Realistically if you let Florida and California drop into the ocean you would remove nearly 30% of the mortgage crisis in the U.S.

There are still signs that the worst is yet to come in the U.S. Orders to U.S. factories fell in August (reported Oct 2^nd, 2008) by the most in almost two years, signalling that business spending slowed down even before the recent worsening of the credit crunch. This downturn in business spending is bound to have an impact on manufacturing and as we see Europe and Japan’s markets falter there will be another blip worldwide as one of the world’s largest consumers cannot afford to buy things.

All things being considered the biggest risk in Canada will be those with greater exposure to the stock markets and those who might have variable lending rates attached to credit. This is as good a reason as any to start looking at your financial plan and figuring out what alternatives there are to the markets and which would provide more security and still enable you to achieve the results you want.