There’s another side to record home sales – record mortgage debt – and it’s making Equifax Canada nervous.
The debt monitoring company said soaring home prices have increased the average amount of a mortgage loan to $355,000, which is 22 per cent higher than a year ago. British Columbia saw the volume of mortgages issued jump by an eye watering 86 per cent.
While the growth is to be expected as the market continues its record run, the increasing popularity of home equity lines of credit have the credit agency wondering if a reckoning is on the horizon for those who choose to tap into their home’s equity while interest rates are low.
“The HELOC trend is worrisome as often the payments are tied to a variable interest rate,” said Rebecca Oakes, associate vice president of advanced analytics. “In 2018 when interest rates went up, we saw a drop in credit card payments, especially among consumers with a HELOC. It also led to higher bankruptcies among older consumers with HELOCs.”
Equifax also worries about the amount of mortgage debt being taken on by buyers with low credit scores. They only account for 10 per cent of all new mortgages, but they are taking on higher debt at the same time as inflation increases.
“Prices for consumer goods have risen and if the inflation trend continues, there is potential for an earlier-than-planned interest rate increase to curb this,” said Oakes. “With many consumers now heavily leveraged and the potential for increases on variable rate mortgage and HELOCs, consumers may find themselves not in a position to pay back their debt obligations if interest rates rise. This can lead to higher insolvencies.”
The agency said consumer debt in Canada stands at $2.15-trillion – up 7.5 per cent from the same quarter last year. On an individual basis the average consumer debt (excluding mortgages) is $20,640.
Meanwhile, more people are paying their debts. The 90+ day delinquency rates for both mortgage and non-mortgage products continued to decrease this quarter, down by 32.6 per cent and 28.6 per cent respectively, when compared to Q2 2020
“Lower delinquencies are a good thing, however, insolvency volumes are higher this quarter than the lows of last year,” said Oakes. “We may see surprise insolvencies occur where consumers with no delinquency history on file and a decent credit score end up filing without warning.”