The Real Scoop: Household Debt

In Quarter 2 of 2017 it was reported that Mortgage Consumer debt reached a record level.

Mortgage holders, despite the increasing monthly payment obligations, have always, and continue to always manage their payments.

The CMHC report stated that Canadian households debt levels have reached to $1.70 for every $1.00 dollar of disposable income.

Mortgage debt is the main driver but credit card and auto loan payments have also been accelerating as well.

The household saving rates in 2017 fell to a 9 year low. An indication that people are saving less, and there is less of a cushion to manage their debts.

The delinquency rate levels, i.e. the rate at which payments are late, have been showing to increase on the credit card, car loan side of things, but not on the mortgage side. This supports the long standing trend that people find a way to make their mortgage payments.

This report came out shortly after the implementation of the first round of the “Stress Test“, which impacted insured mortgages. The report saw new loan origination down 7.3% from a year ago, as well as a decline in the average mortgage debt per consumer with a new mortgage.

Digging Deeper

Some other key findings in the report

• Mortgage debt above $400,000 rose. Roughly 1/3 of outstanding mortgage debt is above $400,000.
• Most of the mortgage holders have mortgages between $200,000 and $300,000 range.
• The average new mortgage loan amount was 1.4 times greater than the average value of existing mortgage loans.

The level of susceptibility to bankruptcy rose among consumers without a mortgage. This is not all that surprising. The gap between those without a mortgage being susceptible to bankruptcy vs someone with a mortgage, widened. To clarify, those with a mortgage have a lower susceptibility to bankruptcy than those without.

Average non mortgage obligations for both people with mortgages and without have risen to their highest levels since 2013.

The share of mortgages that had payments in arrears of 90 days or more fell to a five-year low, signalling a more liquid market where mortgage holders facing difficulties could easily sell their property before reaching serious delinquency, the report noted.

Credit Scores Matter

Interestingly, the report found that consumers with a very good or excellent credit score maintained the largest share of mortgage loans (83.3%), suggesting a low probability of loan defaults.

The number and value of mortgage loans outstanding by consumers with a poor credit score fell to its lowest level since 2012.

The average credit score continued to improve for mortgage holders with both an existing mortgage and a new mortgage.

Those without a mortgage had their lowest average credit score since 2014.

What did the demographics indicate

The report found that the majority of mortgage holders are aged 34–54 and account for roughly 60% of the outstanding mortgage balance.

10% of the market is comprised of people over the age of 65 and those under 35 represent 17% of the market.

The people over the age of 65%, when it comes to the total outstanding balance of mortgages held in Canada, account for roughly 7%, and those under the age of 35 account for nearly 20% of the outstanding mortgage balance of total mortgages.

Mortgage holders aged 35–44 made the highest monthly mortgage payments, averaging $1,323.

Even though mortgage debt is on the rise, the true risk remains on the unsecured consumer debt such as credit cards, the car loans, the lines of credits.

It has become increasingly more difficult to get a mortgage and to own a home, while it has become easier to obtain unsecured consumer debt.

As an example, if you have a car lease, such as a Ferrari, and you are applying for a mortgage, the lease could have a severe impact on being able to qualify for a mortgage.

If you have your mortgage first, and then you decide that you want to lease a car, such as a Ferrari, probably will be approved for that car lease, even with you being responsible for a mortgage payment.