Canada

Canadian Households Have Deferred Payments On Debt Worth $247 Billion

Canadians have a metric buttload of debt, and a lot of it’s not being paid, according to a big three credit bureau. TransUnion data shows the balance of accounts on payment deferrals is now over a quarter trillion at the end of Q2 2020. A significant share of the debt on payment deferrals is subprime, however even more of this debt is with borrowers with  “high quality” credit.

Subprime, Prime, and Super Prime

Just in case you’re a total newb to credit scores, there’s five broad categories people fall into. There’s prime, which is right in the middle, and considered to be good credit. There’s “prime plus,” and for those with really good credit – “super prime” above that. Below prime are “near prime” (oh, so close!) and the infamous subprime. So prime is the middle, and there’s two segments above and below. Pretty straight-forward.

Credit is divided like this to determine the risk of lending to these people under normal circumstances. The better the credit, the lower the risk, and sometimes you even pay less. The worse the credit, the higher the risk, and sometimes you need to pay more – if you can get credit. Circling back, it’s important to note that part about normal circumstances.

During extraordinary circumstances, things can change much faster than credit scores. For example, during the US subprime mortgage crisis, it wasn’t actually subprime borrowers that surged in defaults. Borrowers with above prime credit are actually where the default surge occurred. That’s not the story told, despite contrary evidence – but I digress. The point is, all bets are out the window during rapid shifts of volatility.

Canadian Subprime Borrowers Have Deferred 25% of Balances

The highest percent of balances on payment deferral are what people expect – subprime borrowers. Subprime borrowers have deferred payments on the balance of 25% of loans as of June 30. Prime borrowers have deferred payment on the balance of 16% of loans. Super prime borrows deferred the smallest percent of balances, having paused payments on 8% of loans. Despite the high rate of deferrals for subprime borrowers, it’s a small segment of debt.

Canadian Credit Payment Deferrals

The percent of total dollar value of accounts on payment deferral, by credit quality cohort.

Source: TransUnion, Better Dwelling.

Canadian Deferred Payments On Over $247 Billion In Loans

The total balance of loans on payment deferrals is now over a quarter of a trillion dollars. The total dollar value of the accounts on payment deferrals hit $247 billion on June 30. Subprime borrowers represented just $21 billion of the balance. Prime borrowers represented another $45 billion worth of accounts on payment deferrals. Super prime households represent a whopping $78 billion, nearly a third of the balance. It’s also almost four times the amount of subprime on deferral.

Canadian Credit Account Balances On Payment Deferral

The dollar value of accounts on payment defferals, by credit quality cohort.

Source: TransUnion, Better Dwelling.

Defaults are less likely to occur at the top end, but this can still have an adverse economic impact. The lack of defaults are usually because super prime borrowers have more ways to delay payments – more credit, refinancing, etc… However, these borrowers are also likely to dispose of assets to cope with the debt. Subprime borrowers on the other hand, often ride out bad bills, even paying bills through negative equity.

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26 Comments

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  • Yan 1 month ago

    So it’s the same demographic of people with negative cap condos with tenants that can’t pay?

  • James Wilson 1 month ago

    Friend works at a bank. Apparently you can’t defer your investment property, but you can defer on your primary property and pay the bills on your tenant’s not. That’s a popular strategy.

    • SH 1 month ago

      That is absolutely not true. Investment properties also received the government-forced mortgage deferrals if requested. So many landlords with paying tenants made out like bandits. Revenue from tenants, all put into the stock market for large gains while not paying the mortgage for 6 months.

      Of course renters had no such equivalent benefit.

      • Johnny Gooch 1 month ago

        This has actually been a *very* common strategy and I suspect a ton of deferrals were used like this. Mortgage debt is some of the cheapest leverage around and so the added interest is nothing in comparison to the opportunity cost when using that in financial markets.

      • Johnny Goochinga 1 month ago

        Another really great strategy was if you are self-employed behind a corporation and income split with your spouse even if they are not working. This was an amazing tactic because you could lay off your spouse and collect $2,000/month and then lay off yourself for $2,000/month, but also keep working and just have the income stay in the corporation. Over $20k of free money that can’t be clawed back because you were technically not working and/or being paid!

      • Rick Hyne 1 month ago

        Made out like bandits. Funny. Like most everyone else our economy was deferred not forgive. There is also a cost to defer.

  • SH 1 month ago

    Basically, the mortgage deferrals provided home owners with a government-mandated 6-month loan with which to play the stock market and earn quick gains. Some banks even waived the extra interest. And no hit to their credit score for doing so.

    And renters, as usual, get nothing. They had no option to defer 6 months of rent to put the money into the market.

    • alvi 1 month ago

      Yeah all those evictions from tenants that did not pay their rent what a disgrace,

      • SH 1 month ago

        Non-payment of rent is illegal, even if evictions were temporarily halted. Evictions are starting up once more. Homeowners with loans were provided a legal, and government-mandated, way to access extra capital with the click of a mouse in their online accounts (usually it was that easy to defer) to put into the stock market. Even landlords were provided this option too. Renters were never provided a legal means to defer rent for 6 months. Is that fair?

        • alvi 1 month ago

          Fairness is relative term and with unlimited scope in the context of economics and, dare I, it say social justice. What is fair to you is unfair to me and vice versa
          For instance the fact that the private sector has borne the overwhelming majority of f job losses in pandemic and many public service workers are being paid in full not to work or work for less is unfair to me and others including future generations that have to pay for the debts we accumulate, it also props up the real estate market you singularly oppose. As for mortgage deferrals creating moral hazard that is legitimate concern

          • Average Man 1 month ago

            Sounds like you should have got hired in the public sector then.

          • alvi 1 month ago

            Nah leave if for some “high”-minded individuals who claim to “care “about others but have no problem financing their wage packages through accumulation of debt future generations will have to pay for

  • Risk&Reward 1 month ago

    Deferred payment may not have an actual impact on your FICO score but it is reported on your credit report (Despite Equifax originally saying that it wouldn’t be). Refinancing with recent mortgage deferrals may not be as easy as some may think…

  • Andrew 1 month ago

    When is the homeless / eviction crisis going to hit?
    Is it even possible for this bubble to burst?
    Will CPI inflation increase faster than real estate since mortgage rates can’t go any lower?
    Doesn’t the govt usually increase rates to combat inflation?
    Really confused why real estate is properly being propped up

    • alvi 1 month ago

      If the economy collapses, unemployment ,homelessness and evictions go up

  • Manta 1 month ago

    The government should not allow people with multiple properties to defer mortgage payments. We need to force speculators to sell.

    But we all know the government is hell bent on propping this bubble. They are basically sacrificing young families for economic gain. People in Toronto and Vancouver cant even afford a decent place to live now.

  • Captain Kish 1 month ago

    This entire article rests on the faulty premise that the US financial crisis was NOT caused by the subprime mortgages, and then offers no evidence for that little rewrite of history.

    But I digress.

    • Ethan Wu 1 month ago

      The article literally links to a study breaking down default groups by credit score, showing it was super prime borrowers that surged in defaults.

      If you’re too lazy to click through and read a study, you’re most likely not smart enough to understand the article as a whole.

      But I digress.

  • Asterix1 1 month ago

    Prices are already down in GTA!

    The Average (or benchmarks, seasonally adjusted warping) is up, but actual sold prices are down. Its basic math, change the sales mix, reduce first time buyers, the average goes up!

    Yet no one in the MSM will dare say it (loss of ad revenues).

    • alvi 1 month ago

      Great news, anytime the need to create affordable housing for some( which is unfair because it is not universal) lessens without destroying the economy is a good thing.

  • Fight Back 1 month ago

    The government should not allow people with multiple residential real estate to receive CERB or mortgage deferrals. We need to force speculators and hoarders to sell.

    But we all know the government is the one creating this bubble. We need to investigate government and real estate corruption.

  • Taxplanner 1 month ago

    Some people who have job’s and are working through the pandemic are illegally collecting CERB illegally as well (no ones looking, its just the governments money mentality). Not to mention people working cash jobs.

    Small business owner’s with corporation are the lucky ones:

    1. Stop salary or dividend from corporation and take CERB – 14k (I know of doctors who have done this).
    2. If they paid salary in 2019 – 40k CEBA loan netting 10k (You can multiple this if have multiple corporations).
    3. They have opportunity to have the government cover $847 a week in employee salaries with no limits to number of employees. Saving business owner’s 1000’s.

    These people are building equity on the backs of the working class people in this country. Greed has no bounds.

    As an accountant I urge every Canadian to tax plan better and try to cut off our tax funds to governments. Trudeau and Freeland will piss it away.

    • I am Groot 1 month ago

      Very well put. 100% agree

    • alvi 1 month ago

      and other small business owners were absolutely crushed by this epidemic

      • ex-tax planner 1 month ago

        That’s the thing. Those programs were meant to help people and businesses in need, which I support. The problem is they are open to abuse by both people who are not eligible or people who have the means to rearrange their finances in order to exploit the programs.

        At the same time, governments are flooding the markets with liquidity to keep the current system afloat. It’s no secret house prices are overvalued and have been for the past 15 years.

        I recall in 2008, the notion was our banking system is stronger than the US and thus we did not feel the recession. What’s the excuse this time? Businesses closed, high unemployment, dip in immigration, half of working Canadian’s on welfare, and not paying mortgages.

        This can’t last for long, we should start seeing bankruptcies hit headlines in Canada soon.

    • Fight Back 1 month ago

      Thanks, but most educated young people knows the government is the cause of this horrible housing bubble not the solution. They just want to prop up prices without caring for the negative consequences.

      Time to investigate government and real estate corruption.

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