Canadians are beginning to show minor signs of financial stress, but it’s worth noting. Transunion data shows credit delinquencies for nearly all segments rose in Q4 2022. A big exception was mortgage loans, which remain near the all-time low. However, it’s worth noting that traditionally, mortgage delinquencies lag other credit segments. Consumers experiencing financial stress often triage their liabilities, prioritizing shelter payments.
Canadian Mortgage Delinquencies Are Near Record Lows
Canadian mortgage costs might be on the rise, but payments are showing no signs of stress. In fact, annual growth for the share of delinquencies showed a significant decline (-10.0%). Just 0.18% of outstanding mortgages were 60 days past due (DPD), the lowest this decade, and likely a record.
Canadians Are Falling Behind On Other Segments of Debt
Inflation and rising interest rates might be pushing borrowers to their limits. Delinquency rates showed huge annual growth for installment loans (+49.0%), auto loans (+23.8%), lines of credit (+21.9%), and credit cards (+17.1%). Such a fast rise in rates doesn’t exactly scream, “everything is fine.”
Despite the surge, the actual delinquency rates remain a small share of loans. Installment loans led for its delinquency rate (2.02% of all accounts), followed by auto loans (0.77%). Credit cards (0.5%), and lines of credit (0.24%) were even lower. A low delinquency rate that’s rising aggressively isn’t something to quickly dismiss.
Is This A Problem or Normalization of Credit Problems?
Consumers facing financial difficulty triage their loans, paying the most important first. It’s easier to lose your hot tub than home, so installment loans fall behind before mortgages. Auto loans, credit cards, and lines of credit also tend to be less important than mortgages, and rise first. That’s exactly what we’re seeing with this data.
There are also more mitigation strategies available when it comes to mortgage loans. A homeowner can sell their home before defaulting, or refinance for a lower payment. It’s not until liquidity disappears and buyers won’t absorb a home at the price asked that mortgages fall behind.
Liquidity is more difficult for items purchased with other types of loans. No one wants your used hot tub, especially for anywhere near the amount that you paid.
Don’t read too much into rising delinquencies at these levels. It resembles normalization to pre-2020 levels. We’ve only just begun to see hardship programs that prevent defaults disappear. Over the past few years, it was difficult to find a lender that wasn’t willing to overlook missed payments. Going back to 2019 levels is far from the end of the world.
However, rising delinquencies don’t usually stop without a mitigating event. If rates rise past 2019 levels, and housing inventory begins to uptick, it’s time to worry. Especially if accompanied by rising unemployment.