Canadians love affair with personal debt continues unabated
August 31, 2017
Much can be learned about the priorities of Canadians when you look at borrowing patterns.
Also, much can be learned about the risks of personal debt.
TransUnion is a credit monitoring firm. It released its Q2 2017 Canadian Industry Insights Report in August showing how Canadians borrow.
The numbers show the Canadian dream of homeownership continues. With regard to mortgages, Canadians owe more than ever.
The report shows that as of the end of June, the average Canadian mortgage had just under $200,000 owing, an increase of about five per cent over the last year.
It’s interesting to note that the number of borrowers who have fallen behind on their mortgage payments has decreased. This is the third consecutive quarter of declining delinquencies — anything over 60 days for mortgages.
Clearly home ownership is a priority. Canadians will borrow in order to own a house, and do what it takes to stay current with their mortgage payments.
This information underscores Canadians’ desire about home ownership.
Unfortunately, desire is just part of the equation. Desire to own a home has to be combined with the ability to pay for it. If a mortgage holder wants to pay their mortgage but, for unforeseen circumstances, does not have the funds, then everything changes.
The largest single risk for home owners who have a mortgage is interest rates.
Interest rates have been historically low for so long that many borrowers don’t even consider that they can be significantly higher.
The long-term track record of interest rates is that they rise and fall. Predicting future rates is somewhere between difficult and impossible.
If and when interest rates increase, the desire for a mortgage holder to make regular mortgage payments will be superseded by their lack of ability.
The same mortgage that was manageable at current interest rates will be beyond the financial means of some as rates increase.
In September 2016, TransUnion stated that close to a million Canadians would struggle with making increased repayments if the interest rate on their total debt, including mortgages, increased by even one percentage point.
If interest rates do increase and many find home ownership too expensive there will be more house sellers than buyers. House prices will decline.
This will affect mortgage holders, mortgage lenders, home owners who do not have mortgage debt, and the entire Canadian economy.
Future interest rate increases are a significant financial risk for us all.