Canadians are not known for our outstanding displays of financial literacy. Our hulking personal debt loads and questionable decisions around borrowing have become as much a part of our national fabric as lining up for a cup of Tim’s in the morning. That’s what makes TransUnion’s Industry Insights Report for the third quarter of 2020 such a pleasant surprise.
Average non-mortgage consumer debt fell by 4.2% year-over-year in Q3, led by an 11.6% decline in credit card balances. Auto loans and line of credit balances dipped by 2.9% and 4.3%, respectively.
Matt Fabian, TransUnion’s director of research and consulting, told Mortgage Broker News that the declines represent “pretty good resiliency in the Canadian credit market.”
Naturally, there just has to be a caveat: The ability of Canadians’ to reduce their debt loads has been fuelled in no small part by federal assistance programs – Canadian Emergency Response Benefit, Canadian Recovery Benefit – and payment deferral options offered by lenders and credit card companies.
“We know that deferrals are masking” a potentially higher number of delinquencies, Fabian said. “But as payment holidays and deferrals have been rolling off, we still haven’t seen a massive spike in delinquency rates.”
TransUnion’s data found that deferrals are not the only method Canadians are using to reduce their debt loads. They are spending less overall, making fewer big-ticket purchases, and using those savings to actively pay down their existing credit balances. They are also limiting their use of new credit products. New account openings were down 41% in the second quarter of 2020, the most recent data available due to a reporting lag. Part of that substantial decrease, Fabian explained, is due to providers’ efforts to mitigate risk by reducing the amount of credit they make. But the rest is the result of Canadians recognizing the potential folly involved with taking on new debt at a time of widespread economic nausea.
The decline in non-mortgage debt should be good news for borrowers who find themselves on the cusp of credit-worthiness in the eyes of the nation’s lenders.
“Lenders are looking for that balance of what’s your income or wealth compared to how much debt you have,” Fabian said. “If that second number is falling, that ratio gets larger, so you’re going to qualify for not only additional credit, but credit limit increases or a larger mortgage.”
What’s to come in ’21?
The trends established in Q3, even the 5.6% rise seen in the average mortgage balance, bode well for 2021.
Fabian said that TransUnion’s modelling indicates muted credit growth next year, as Canadians are expected to remain conservative in their spending. Non-mortgage balances are projected to increase by only 0.2% by the end of 2021, with non-mortgage consumer delinquency rising by nine basis points.
Mortgage delinquencies are forecasted to increase both this year and next, but the overall levels will remain, as stated in the report, “manageable.”
“Delinquency rates are going to go up through 2021, but they’re not going to have that hockey stick spike that a lot of people were worried about,” Fabian said. “That cliff that people were talking about, we don’t see that happening.”
The billion-dollar question remains what happens to the hundreds of thousands of people still making use of mortgage deferrals once their payment holidays end. Many homeowners, thanks to the steady incomes that allowed them to secure mortgages in the first place, have escaped the worst of the pandemic’s economic shocks. But if the second wave of COVID-19 hits the economy as hard as the first, it may not just be minimum wage workers and waitstaff feeling the bite. Homeowners, particularly those who were struggling to make their mortgage payments before the pandemic, could be the next victims.
Fabian, however, isn’t worried. With home prices having been blasted into the stratosphere by the past five months of record-atomizing real estate activity, many homeowners are sitting on soft, pillowy equity cushions that will allow them to sell their properties and walk away with their bank balances and Beacon Scores intact.
And let’s give credit (pun absolutely intended) where it’s due. Canadians have overwhelmingly proven themselves to be responsible homeowners. After conducting multiple payment hierarchy studies, TransUnion found that, even when feeling the pinch of reduced cash flow, Canadians tend to pay their mortgages first.
“Those secured things, where you can get something taken away, people tend to protect. And mortgage has historically been the debt that people will go delinquent on last,” he said.
Pleasant news and positive projections aside, TransUnion’s report was assembled under the assumption that the second wave of COVID-19 infections would be one of regional spikes, not the out-and-out onslaught the country is currently failing to contain.
“If we really get into a second wave,” Fabian said, “all bets are off. Our forecast will probably be really understated.”