Concerns as new mortgages jump to record high

Tuesday, August 31, 2021

New mortgage volumes climbed to more than 410,000 during Q2, the highest volume ever recorded in a single quarter. This is a 60.2 per cent increase compared to the same period in 2020, according to Equifax Canada’s most recent consumer credit trends and insights report.

Soaring home prices have also increased the average loan amount for new mortgages to more than $355,000, a 22.2 per cent increase from Q2 2020.

B.C. saw an exceptional increase in new mortgage volume during the second quarter with a year-over-year increase of 85.7 per cent. Apart from a strong housing market, seasonality and refinancing also played a big role. High mortgage growth and low interest rates have helped home equity lines of credit (HELOCs) rebound. New HELOC volume increased by 56.7 per cent when compared to Q2 2020 — the highest it has been in the last ten years.

Analysts are voicing their concerns about the variable rate of HELOCs and mortgages.

“The HELOC trend is worrisome as often the payments are tied to a variable interest rate,” said Rebecca Oakes, AVP of Advanced Analytics at Equifax Canada. “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.”

Another concerning trend Oakes points to is the amount of mortgage debt being taken on by consumers with lower credit scores. These consumers form a small percentage of all new mortgages (10 per cent), but their average loan amount has increased at the same rate as consumers with higher credit scores.

With uncertain times due to the pandemic still ahead, these consumers could find themselves less equipped to manage future additional financial stress. Adding to the concern, according to Oakes, is the rate of inflation, up 3.7 per cent in the last 12 months, which is the highest annual increase since May 2011.

“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,” she said. “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.”

Consumer debt stands at $2.15 trillion

Overall consumer debt now stands at $2.15 trillion, driven by considerable mortgage growth. This is up 3.0 per cent from last quarter and up 7.5 per cent from Q2 2020.

New credit card growth is also picking up pace, doubling the volume seen a year ago when demand was at its lowest.

Despite deferral programs ending, delinquency rates dropped from Q1 2021. Government support and increased disposable income are still helping consumers pay off their debts and improve their credit score. The average Equifax credit score for consumers increased by 12 points in the last two years.

“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.”

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