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Even though Canadians owe more than ever on their mortgages and are taking on ever more burdensome levels of debt, fewer borrowers are falling behind on their mortgages, according to a new report from TransUnion.
However, far from providing proof that the average Canadian household has mastered financial responsibility, the nation’s low national mortgage delinquency rate is hiding other serious struggles, according to Laurie Campbell, CEO of Credit Canada Debt Solutions.
“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.”
To see the bigger picture, Campbell said all you need to do is look at how much debt Canadians are carrying.
For every dollar of disposable income the average Canadian has, Statistics Canada says they owe nearly $1.70 in consumer debt, mortgages, and other loans. In contrast, during the early 90s, Canadians owed less than 90 cents for every dollar in disposable income.
The dramatic shift in the overall level of consumer debt places borrowers in a precarious position if their income drops or disappears. It would be equally disastrous if higher interest rates caused their monthly payments to go up.
Banks shouldn’t start worrying about people walking away from their mortgages though, as their first concern should be credit cards, according to Jason Mercer, an analyst at Moody’s.
Mercer said there’s a hierarchy of payments in borrowers’ minds, with credit card debt languishing at the bottom, as it’s seen as the easiest debt 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, a person who misses enough monthly mortgage payments could face foreclosure.
And while Canadians for the most part have stayed on top of their credit card payments, they’re currently in a very precarious place, many analysts warn.
According to a recent poll by MNP Debt, more than half of those polled said they couldn’t handle an additional $200 in monthly costs. If interest rates continue to rise, debt servicing costs would shoot up as well, and an additional $200 each month in bills could become a reality for some.
Even if it does not affect some of us directly, as others set aside more money towards clearing debts instead of spending, the entire economy would feel the impact, Campbell said.
Campbell said now is the time for people to do a personal financial stress test to avoid not only risking their financial stability, but for many, 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.”
