Safeguarding Your Wealth in an Increasingly Volatile Financial Landscape

Source Article: Bank of Canada flags risks from rising interest rates

The Looming Mortgage Crisis

According to The Financial Post, while most households are managing the higher costs of debt servicing, many mortgage holders are expected to face substantial payment increases upon their mortgage renewals in the next two-and-a-half years. This impending wave of mortgage renewals at higher interest rates poses a significant threat to financial stability.

Governor Tiff Macklem of the Bank of Canada highlighted the ongoing adjustment to higher interest rates as a continued risk during the release of the bank's annual report on financial system stresses. Senior Deputy Governor Carolyn Rogers pointed out that renters are also experiencing stress, with the share of households without a mortgage that is behind on credit card and auto loan payments returning to, or surpassing, typical levels after reaching historic lows during the pandemic.

Furthermore, over the past year, the percentage of borrowers without a mortgage who carry a credit card balance of at least 80 percent of their credit limit has increased, signalling mounting financial strain.

A Perfect Storm

The report also flagged several other pressing issues, including stretched valuations of some financial assets, a sharp increase in leverage used by the non-bank financial sector, and exposure risks to commercial real estate, which has seen a rise in the national office vacancy rate to around 20 percent.

Since March 2022, when the Bank of Canada began increasing interest rates, payments have risen for about half of all outstanding mortgages. A significant portion of these mortgages will renew in the next two-and-a-half years, leading to larger payment increases for these borrowers.

"Higher debt-servicing costs reduce a household's financial flexibility, making them more vulnerable if their income declines or they face an unexpected material expense," the report noted.

It was highlighted that the median increase in monthly mortgage payments would exceed 20 percent at renewal in 2025 and more than 30 percent in 2026 compared to their origination. The financial pressure will be most acute for households that took out mortgages around the peak of house prices in 2021 and early 2022 when rates were very low. These households, having taken on large mortgages relative to their incomes, have seen minimal increases or even decreases in home equity.

By the end of 2023, more than a third of new mortgages had a debt-service ratio greater than 25 percent, a doubling from 2019.

The Banking Sector's Precarious Position

The report also mentioned that while large banks with healthy capital cushions are managing mortgage market stresses, some smaller lenders have seen a notable increase in credit arrears.

"Increased provisions for loan losses are impacting profitability but also enhancing banks' resilience," the report stated. It also noted that funding remains stable for banks, though costs have risen.

The report concluded that while most borrowers should manage with conservative wage increases, and some are adjusting by increasing savings and making lump-sum contributions, a significant financial shock, such as a rise in unemployment, could heavily impact the financial system and the banks.

The Custodial Model: A Safeguard in Turbulent Times

Amidst this maelstrom of risks, traditional banks and brokerage firms may prove inadequate in safeguarding your wealth. By holding client assets on their own balance sheets, these institutions expose your hard-earned assets to the very legal mechanisms that could render them vulnerable to seizure in the event of a financial crisis or institutional insolvency.

In contrast, private wealth management firms operate under a custodial model, ensuring that client assets are held securely by an independent third-party custodian, segregated from the firm's own assets. This critical separation provides an additional layer of protection, reducing the risk of asset seizure or misappropriation in the face of institutional turmoil.

A Partnership for Preserving Your Wealth

To navigate this complex landscape of heightened risk, I have partnered with one of Canada's leading private wealth management firms serving high-net-worth clients nationwide. This firm offers professional investment management and comprehensive wealth planning from a client-first perspective, providing affluent Canadians access to sophisticated strategies and solutions usually reserved for the ultra-affluent.

Driven by a "capital preservation first" philosophy, the firm generates consistent, tax-efficient returns uncorrelated to public markets. Through my relationship with this firm and other key industry professionals and firms, my clients gain exclusive access to alternative investments such as private equity, private real estate, precious metals, commodities, government-sanctioned flow-through tax structures, and tax-efficient corporate insurance solutions – all designed to fortify and de-risk portfolios against economic threats, inflation, and higher taxes.

Complimentary Portfolio Evaluation

Safeguarding your wealth is paramount in these tumultuous times. As a valued reader, we are offering a complimentary portfolio evaluation to assess your exposure to looming risks and ensure your portfolio is resilient to potential shocks.

Email me at [email protected] or use my Calendly Link to book your complimentary portfolio evaluation.

During this no-obligation consultation, we will provide insights into how we can help you navigate the turbulent waters, preserve your wealth, and fortify your portfolio against economic threats while aligning with your long-term financial goals.

By proactively implementing these strategies, you can safeguard your wealth against market volatility and position your portfolio for long-term growth and stability, even in the face of an ever-changing and increasingly precarious economic landscape.

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