Two new studies give reason for optimism and concern
Two recent reports released by TransUnion Canada shed new light on Canadian borrowers’ credit usage and their view of their own financial struggles heading into the seventh month of the COVID-19 pandemic.
In its Q2 Industry Insights Report, TransUnion found that while outstanding debt in Canada grew 4.3 percent to hit $1.9 trillion in the second quarter, only two products, installments and mortgages, contributed to the growth.
Installment debt rose by 3.9 percent to hit $175.4 billion, while mortgage debt was up 5.3 percent and now sits at over $1.3 trillion. Total credit card debt, driven by a decrease in holiday and home improvement expenditures, fell by 12.3 percent year-over-year in Q2, declining from $96.4 billion in 2019 to $84.6 billion at the end of June. Auto loan and line of credit debt fell by 3.3 percent and 3.2 percent, respectively, bringing their total amounts down to $62.4 billion (auto) and $248.9 billion (LOC).
According to TransUnion, mortgages were also the only product category to experience an increase in origination volume in the first quarter (originations have a reporting lag of one quarter), surging 29.2 percent year-over-year. Credit card originations, on the other hand, fell by 13.5 percent. COVID-19 played a role, but TransUnion explains that credit card originations had already been declining for several quarters prior to the pandemic due to market saturation. Auto loan originations decreased by an undisclosed amount.
While a decrease in consumer debt is welcomed news, especially with CMHC’s Evan Siddall warning lenders about the potentially damaging impact of high-ratio mortgages, Matt Fabian, director of financial services research and consulting at TransUnion, encourages Canadians not to read too much into the decline.
“It’s probably more a temporary thing that is COVID induced,” Fabian told Mortgage Broker News in an email.
Part of the decline, he explains, was due to record low spending, as consumers had fewer places to spend because of lockdown orders and were postponing larger purchases.
“Some consumers will continue to deleverage as credit fatigue sets in due to the economic impact of COVID-related shutdowns,” Fabian said, adding that seasonal levels of credit usage should return as the economy continues to stabilize.
TransUnion found that the number of consumers with delinquent balances actually fell by 10 basis points during the second quarter, led by a 14-basis point decrease in the credit card delinquency rate. The rate of mortgage delinquencies crept up by three basis points to hit 0.31 percent, while the rate of installment/personal loan delinquencies increased by 14 percent, a surge TransUnion attributes to alternative lenders “who have been slightly more aggressive in issuing personal loans to Below Prime consumers.”
Fabian credits deferral programs and government aid for the overall decrease in delinquencies.
“These seem to have been effective at supporting Canadians through the downturn. As these programs begin to wind down, we expect to see some increase in delinquency,” Fabian said.
TransUnion found that delinquency rates have been corresponding closely with borrowers’ CreditVision scores. Over 15 percent of Subprime consumers (those with scores between 300 and 639) and almost 13 percent of Near Prime customers (640 to 719) have taken a deferral on at least one credit product. For Super Prime consumers (above 800), only 6.1 percent have opted for a deferral.
TransUnion estimates that 2.6 million Canadians had at least one active deferral in Q2 2020.
Consumers’ situations slightly improving
The Industry Insights findings came on the heels of TransUnion’s most recent Financial Hardship Report. The report, based on an August 1-3 survey of 1,050 adults, found consumers to be more confident than at any time since the onset of the COVID-19 pandemic. While a still worrying 53 percent of respondents reported that their household is being negatively impacted by COVID-19, that represents a 10 percent improvement compared to the high seen in April. When asked if they expect to be impacted by COVID-19 “in the future”, only six percent responded yes.
But consumers feeling the bite COVID-19 has taken out of their earnings are experiencing serious doubts about their ability to stay on top of their debts and bill payments. Sixty-two percent of them said they are “concerned” about their ability to meet their future obligations, with credit cards, utilities and rent being the most problematic. Impacted consumers predicted that they will be unable to pay their bills or loans within 7.7 weeks of taking the survey. When that time comes, they expect their budgets to come up short by an average of $877.20.
No surprise, then, that the number of respondents indicating that they plan to make use of programs such as payment holidays or deferrals to help manage their debt loads increased from 10 to 13 percent month-over-month. Twenty-six percent of those reducing or holding off on making their payments said they hope to extend their deferral periods further.
But not everyone is struggling. The proportion of consumers utilizing deferrals or payment holidays shrunk from 18 to 16 percent, and the majority of mortgage (52 percent) and auto loan (54 percent) customers have already returned to making full payments.
When asked if TransUnion is worried by the growth in mortgage borrowing at a time when so many Canadians say they are still being impacted negatively by COVID-19, Fabian expressed little concern.
“There’s always a worry about fall in house prices, but demand will likely keep values high,” he said. “The new stress testing measures introduced in 2018 have been effective in driving down qualifying mortgage values, which should offset some of this concern. Delinquency rates for mortgages remain relatively stable.”
