Fewer borrowers are falling behind on their mortgage payments, according to new data out this week from credit monitoring agency TransUnion.
So, should we celebrate Canadians’ financial responsibility?
Not so fast.
For years, Laurie Campbell the CEO of Credit Canada Debt Solutions has helped people through some of their most desperate financial situations. She says a low national delinquency rate on mortgages hides other serious struggles.
“When people become house poor, they’ll do anything to hold onto their home. They’ll rely on high-interest credit, such as credit cards to bridge that gap,” Campbell said. “The delinquency rate only tells half the story.”
For the full story, Campbell says, look at how much debt Canadians are carrying.
For every dollar of disposable income the average Canadian has, Statistics Canada says they owe almost $1.70 in consumer debt, mortgages and other loans. In the early 1990s, Canadians owed less than 90 cents for every dollar in disposable income.
The dramatic change in behaviour puts borrowers in a precarious position if their income drops or disappears, or if higher interest rates cause their monthly payments to go up.
“I thought we would’ve broke the bank by now,” Campbell said. “Many Canadians have over-leveraged themselves with their mortgages.”
Worry #1: Credit cards
Before banks need to worry about people walking away from their mortgages though, the concern should be credit cards, according to Jason Mercer, an analyst with Moody’s who follows the financial sector in Canada.
Mercer says there’s a hierarchy of payments in borrowers’ minds, and credit card debt is at the bottom because it’s the easiest to walk away from.
“There isn’t really an asset that can be seized with a credit card, so the only negative part of defaulting on a credit card is you get a black mark on your credit report,” Mercer said.
On the other hand, in the case of someone missing more than a couple of monthly mortgage payments, the worst-case scenario would be foreclosure.
While Canadians are taking on more and more consumer debt using credit cards, they’re also, for the most part, keeping on top of it.
But again, that’s not necessarily an indicator of what’s to come.
“You won’t be able to see when trouble is starting just from the delinquency rate. Delinquency is after trouble’s already happened,” Mercer said.
This might not end well
Some surveys show trouble could be brewing.
A recent poll by MNP Debt found that more than half of those Canadians surveyed couldn’t handle an extra $200 in monthly costs.
If interest rates continue to rise, debt servicing costs will go up, and an extra $200 a month in bills could easily be a possibility for some.
Even if that doesn’t affect a person directly, as others put more money toward paying down debt instead of spending, Campbell says, the entire economy will feel it.
“There is a trickle down effect, whether we like it or not,” Campbell said.
Campbell says now is the time to do a personal financial stress test so Canadians don’t stretch themselves too thin and risk not only their financial stability, but for many, also their pride.
“Homeownership is definitely the Canadian dream,” Campbell said. “It’s an obvious financial problem in your life if you have to sell your home if you can’t afford it. And people don’t want to be that person.