Canadians are managing to keep up with their mortgage payments in the face of higher interest rates, but a new Statistics Canada analysis suggests there are cracks forming on other kinds of debt.
The agency released a report Wednesday tracking how debt levels changed from pre-COVID-19, through the pandemic and into the ensuing economic rebound, up until late 2023. It also captures the impacts of rising interest rates as the Bank of Canada sought to tame decades-high levels of inflation.
Overall levels of non-mortgage debt — credit cards and auto loans, for example — declined during the early months of the pandemic as lockdowns across the economy convinced many Canadians to save up and pay off loans.
But since the economy reopened in force around 2022, Canadians have returned to borrowing: debt levels have risen since then, “ultimately wiping out the previous effects,” StatCan said in the report.
While the report said “several factors” could explain the rise in debt, StatCan pointed to the surge in annual inflation, rising to a peak of 8.1 per cent in June 2022, making the cost of living higher for Canadians.
StatCan noted that lower-income Canadians were particularly vulnerable to decades-high levels of inflation, typically having less savings and with more of the household budget going towards essentials and fewer discretionary purchases they could cut back on. This may have made these households more reliant on credit card debt to accommodate sudden price shocks, the agency said.
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As of last year, non-mortgage debt was higher than its pre-pandemic level in Canada, hitting $553.1 billion in the third quarter of 2023, 13.7 per cent higher than in the first quarter of 2020.
StatCan pointed to a rising population — and more credit card holders, by extension — as one factor driving up overall debt levels in the pandemic recovery. Auto loans were also trending higher in this period after supply chain snarls spurred a backlog in demand for vehicles, which flooded back despite rising interest rates and higher prices for new and used cars.
Canadians got some help paying down their loans in the first few years of the COVID-19 pandemic in the form of government support. But that ebbed in 2022 as interest rates began to rise, StatCan noted, pushing up the rates of loans going into arrears — debt payments that are late by 90 days or more.
Rates of arrears for both credit card debt and auto loans were above pre-pandemic levels as of the third quarter of 2023.
Non-mortgage debt represents 30 per cent of loans, according to StatCan.
Why were mortgage arrears not rising?
On the mortgage debt side of things, StatCan says there had not been a similar increase in arrears since the Bank of Canada rate-hike cycle began in March 2022.
Arrears were still below pre-pandemic levels as of the third quarter of 2023, by less than a tenth of a percentage point.
This comes despite a rapid interest rate cycle that, as of mid-2024, has seen roughly half of homeowners renew their mortgages in a more costly environment for borrowing. The Bank of Canada has delivered a total of 50 basis points of interest rate cuts in the past two months, but the rate hike cycle hit its peak with a policy rate of 5.0 per cent in the third quarter of 2023.
That had a particularly steep impact on Canadians with variable-rate mortgages, who see their contract rates rise and fall in line with the central bank’s rate moves.
While some of these homeowners saw their monthly payments immediately increase in response to each rate hike, others saw their payments remain static while the proportion that went towards interest rose instead, extending the length of their loan rather than their payment amounts.
StatCan points to flexibility towards these households as a possible explanation for why mortgage arrears did not rise during the rate hike cycle.
Variable-rate mortgages with fixed payments come with a trigger rate, which activates when their payments no longer cover any of the principal loan. By the first half of 2023, nearly 80 per cent of Canadians with these kinds of mortgages had hit their trigger rates, according to the Bank of Canada.
Rather than forcing Canadians to raise their payments immediately, some lenders allowed these loans to stretch into negative amortizations for a while until their term was up for renewal, at which point homeowners would have to agree to new terms.
Citing the Bank of Canada’s estimates, StatCan said that the typical borrower renewing in 2025 or 2026 will have to increase their payment amount by roughly 40 per cent to reset to their original 25-year amortization schedule.
Among all kinds of mortgages, the Canada Mortgage and Housing Corp. figures show that roughly 2.2 million mortgages will face an “interest rate shock” upon renewal this year or next, with those loans amounting to more than $675 billion.
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