Does this signal a significant financial strain?
A new Statistics Canada (StatCan) report has found that most Canadians have managed to keep up with their mortgage payments despite a sharp rise in interest rates. However, cracks are beginning to form in other areas of household debt.
The report, released Wednesday, examines the evolution of Canadian debt levels from pre-COVID-19 through the pandemic and into late 2023, capturing the economic recovery and the impact of rising interest rates as the Bank of Canada sought to control inflation.
Non-mortgage debt—such as credit card balances and auto loans—declined during the early stages of the pandemic. Lockdowns spurred a wave of saving and debt repayment, reducing these debt levels significantly. However, as the economy reopened in 2022, borrowing resumed, erasing the progress made earlier. By the third quarter of 2023, non-mortgage debt had surged to $553.1 billion, a 13.7% increase from the first quarter of 2020.
Several factors contributed to this rise in debt, with StatCan highlighting inflation as a key driver. Annual inflation peaked at 8.1% in June 2022, driving up the cost of living and pushing many Canadians, particularly those with lower incomes, to rely more on credit. Lower-income households, which typically have less savings and spend more of their income on essentials, were hit hardest by these price shocks.
The analysis also noted that rising population levels have fuelled the increase in overall debt, as more credit card holders and auto loans have entered the financial system. Demand for vehicles, which had been stifled by supply chain issues during the pandemic, surged back, driving up auto loans despite higher interest rates and car prices.
Historical debts piling up
During the early years of the pandemic, Canadians received government support that helped them manage debt. However, as this aid waned in 2022 and interest rates began to climb, the rates of loans going into arrears—defined as debt payments that are more than 90 days overdue—began to rise. By the third quarter of 2023, arrears for both credit card debt and auto loans had exceeded pre-pandemic levels.
In contrast, mortgage debt has shown more resilience. Despite the Bank of Canada’s aggressive rate hikes, which began in March 2022, mortgage arrears remained below pre-pandemic levels as of the third quarter of 2023. StatCan has attributed this to the flexibility lenders have shown to borrowers with variable-rate mortgages.
Variable-rate mortgages, which fluctuate in line with the central bank’s rates, have been particularly impacted. By mid-2023, nearly 80% of Canadians with these mortgages had reached their trigger rates, where payments no longer covered any of the principal. Rather than requiring immediate payment increases, some lenders allowed borrowers to temporarily extend their loan terms. However, this flexibility may be short-lived, as borrowers renewing in 2025 or 2026 could face a 40% increase in payment amounts to reset their amortization schedules.
The situation underscores the growing financial strain on Canadian households as they navigate a challenging economic landscape marked by high interest rates and persistent inflation. With 2.2 million mortgages set to face renewal in 2024 or 2025, totalling more than $675 billion, the pressure on Canadians’ finances is expected to intensify.
Do you have something to say about this story? Leave a comment below.
