A recent analysis by Statistics Canada indicates that Canadians are effectively managing their mortgage payments despite higher interest rates. However, there are concerns regarding the rise in other types of debt, such as credit cards and auto loans.
The report tracks the changes in debt levels from pre-COVID-19 to the present economic rebound, taking into account the impact of increased interest rates imposed by the central bank. While non-mortgage debt levels initially decreased during the pandemic due to lockdown measures prompting savings and loan repayments, they have since rebounded and surpassed pre-pandemic levels.
Factors contributing to the rise in debt levels include surging inflation rates, which peaked at 8.1% in June 2022. Lower-income households are particularly vulnerable to inflation, potentially leading to increased reliance on credit card debt to cover essential expenses.
Despite government support during the early stages of the pandemic, the reduction in aid coupled with rising interest rates has led to higher rates of debt arrears, especially in credit card and auto loan payments. As of the third quarter of 2023, non-mortgage debt in Canada stood at $553.1 billion, representing a 13.7% increase from pre-pandemic levels.
While mortgage arrears have not seen a significant rise since the interest rate hikes began in 2022, non-mortgage debt levels continue to increase. The transitioning economic landscape, coupled with supply chain disruptions affecting auto loans, has contributed to the rise in overall debt levels in the country.
Flexibility in lending practices has helped to mitigate the impact on mortgage arrears, particularly for variable-rate mortgages. Lenders have allowed some loans to stretch into negative amortizations until renewal, providing relief to homeowners facing rate hikes.
Looking ahead, borrowers facing mortgage renewals in the coming years may need to increase their payments by 40% to reset to their original amortization schedules. The Bank of Canada estimates that around 2.2 million mortgages totaling over $675 billion will face an “interest rate shock” upon renewal in the near future.
