First the good news: the number of Canadians skipping payments on home loans and other forms of credit has declined to historically low levels, according to a report from credit watchdog Equifax Canada on Monday.
The number of folks who have missed or failed to make a payment for 90 days or more is down 19.2 per cent compared to spring 2012, the agency said.
That’s partly because ultra-low interest rates have helped keep payments more affordable. The bad news: interest rates are headed higher, making the cost of carrying that debt more expensive, not just on mortgages but all forms of credit, economists and other experts say.
With consumers amassing record amounts of debt in recent years, the bad news could get downright ugly as home owners battle to keep up with higher mortgage payments.
“It’s clear that households have more debt than they did in the past and the cost of taking on that debt is rising. That is a bit of a concern,” Diana Petramala, an economist with TD Bank said in a phone interview.
Equifax said a total of $77 billion in new credit was taken on by households in the spring quarter, up 6.1 per cent from a year earlier. Through mortgages, car loans, lines of credit and credit cards, Canadians collectively owe $1.345 trillion, compared to $1.326 trillion last spring.
Much of the new credit came in the form of new mortgages, as buyers rushed to take advantage of still-low rates being offered by banks, rates that have moved 0.7 percentage points higher since mid-June.
“We saw consumer spending pick up a little bit as well the housing market re-ignite in the May to June period,” Petramala said. “The housing market had a lot to do with the run-up in debt.”
Since then, banks have been busy raising home-loan interest rates. The main reason: their own costs of borrowing are rising in response to movements in bond markets, while the increases are being passed on to borrowers.
Last week, BMO, TD and RBC pulled up rates on a standard, five-year fixed mortgage to 3.89 per cent.
The hikes mean new borrowers with “average” incomes who take out an “average”-sized home loan will be paying about $130 a month more than what they would have if they’d taken a mortgage before the hikes, when rates were around 3.0 per cent, a note from TD economics says.
For those with mortgages or incomes outside of those parameters, the financial bite every month will be even greater, experts say, something that will put pressure on household finances. But to what extent remains unclear.
TD doesn’t publish mortgage rate forecasts, but it does for interest rate outlooks on short and long-term bonds, which mortgage rates are tied to. Based on the bank’s bond estimates, a standard five-year fixed rate mortgage may rise to 4.97 per cent by 2015.
That upward swing could amount to several hundred dollars a month in additional interest payments for many, and is perhaps the central reason why policy-makers and market watchers have been calling for Canadian households to rein in debts now.
Sal Guatieri, a senior economist at the Bank of Montreal, said consumer borrowing has slowed in recent months, at least as a percentage of household income. Indeed, the so-called debt-to-income ratio, which economists rely on to gauge the health of Canadian household’s balance sheets has pulled back in recent months from all-time highs.
“It’s now growing at the slowest rate in almost 17 years,” Guatieri said by phone, relying on May figures. “Households have really pulled back on their rate of borrowing.”
But he added: “It’d be nice to see credit growth slowing just bit further … then we don’t have to worry about hitting a so-called debt wall when interest rates normalize.”