...is the number of Canadians which used a credit product over the year 2019, representing 73% of the total population of the country. That explains that the deterioration of the economic situation creates fears that Canadian households may be incapable to pay off their debts.
A spectacular growth of the mortgage payment arrears in Canada since April 2020
With the Covid-19 situation, Canadian households' finances are being deteriorated. That's what numbers and previsions published by the Bank of Canada illustrate. Indeed, the graph below shows that the rate of mortgage payment arrears dramatically increased in 2020, even if it is expected to decline gradually in 2021. In particular, we observe that :
- The cumulated rate of mortgage payment arrears increased significantly between April and October 2020, from 0.89% to 1.59%, a historically high level for Canada
- Deferred payments allowed by lenders rose a lot in 2020, and the tendency should go on in 2021 with an expected tripling arrears with deferred payment between October 2020 and October 2021
- As a result, the rate of mortgage arrears is not expected to return to pre-crisis levels until 2022 or event 2023, when the Canadian economy will have fully recovered.
Mortgage arrears rates simulation from 2020 to 2021 (Source: Bank of Canada)
To ease the expenses of households experiencing financial hardship as a result of the pandemic, most Canadian lenders have allowed mortgage payments to be deferred for up to 6 months.
Why and at what level do Canadian households take on debt ?
If the indebtedness of Canadian households are concerning in this Covid period, it's because the population is used to deal with a wide range of credit products to purchase many goods and services.
The graph below shows that nearly 40% of Canadian households use a mortgage loan to finance their principal residence. Other debt products include:
- Loans to buy a vehicle (used by 28% of Canadians)
- Consumer credit through a credit card (also 28%)
- Student loans (11%)
- Mortgage loan for the purchase of a property other than a principal residence (5%) or a personal loan (3%)
Percentage of Canadians and the types of debt they hold in 2019 (Source: Government of Canada)
More than 30% of Canadians believe they have too much debt in 2019
According to Statistics Canada, 30% of Canadians believed they were over-indebted in 2019. If we look at the median value of the different types of debt held by Canadian households, it is not surprising to find mortgage loans in the highest part, with a median value of 262,000 $ of the balance to be repaid in 2019, before the crisis.
|Types of debt||Median debt value|
|Mortgage loan for the purchase of a property other than the principal residence||262,000 $|
|Personal loan or other debt||40,000 $|
|Personal line of credit||38,000 $|
|Leasing or buying a vehicle||36,000 $|
|Student loan||28,000 $|
|Unpaid credit card balance||28,000 $|
The effects of the crisis counterbalanced by certain safeguards
With the increase of unemployment across Canada and the global decline of the economic activity, it is to be feared that the percentage of Canadian households with financial difficulties will rise. However, many points have a stabilizer role:
- First, as we saw above, the majority of lenders allow deferred payments up to 6 months due to the Covid
- In some provinces (especially Quebec), high household savings rates compensate for losses
- As the graph above is showing, 13% of Canadians use a credit line, which can act as a valuable reserve in the event of a crisis.
Among Canadians households, Quebecers are doing better than the rest of the country
While the overall debt situation of Canadian households has worsened as a result of Covid-19 crisis, there's still big disparities according to provinces. Indeed, based on an economic note published by Desjardins bank, the indebtedness situation is far better in Quebec than in the rest of the country.
- The debt rate of Quebecer households is at 155% in 2019 (calculated based on households' incomes after taxes), even initiating a light decrease before the Covid crisis
- Before the crisis, the savings rate of Quebecer households rose significantly to reach 8% in 2019, i.e. 6 points more than the rest of the country;
- In 2019, Quebecer households dedicated 28% of their disponible incomes to mortgage payments.
Across the rest of Canada:
- The reverse situation is occurring in the other Canadian provinces, with an increasing debt ratio, set at 175% in 2019 (and even 188% in Ontario)
- Overall Canada, the savings rate went from 5.1% to 1.8% in 5 years, at the opposite of Quebec
- On average, in 2019, all Canadians dedicated 35% of their disponible incomes to mortgage payments (even 40% in Ontario!).
Why these differences?
Thus, with a much better debt situation in Quebec, households in this province experienced less difficulties throughout the Covid period. Here are some reasons that can explain these differences:
- Real estate prices are pretty low in Quebec comparing to other provinces (especially in Ontario and B.C.)
- A low unemployment rate and an economy in good shape
- Tax breaks decided by the Quebec government in recent years
- The rise of incomes in Quebec in the last decade.
In 2019, one in six Canadians was spending more than the money earned
The Covid seems to cause difficulties to some Canadian households to pay off their debts in 2020. Data from Statistics Canada enable to know the Canadians' opinion about the management of their personal finances. This survey revealed that:
- More than 60% of Canadians are able to manage their finances without any difficulty in 2019.
Percentage of Canadians who have difficulty paying bills / managing cash flow in 2019 (Source: Government of Canada)
- Approximately one-third of participants have difficulty managing their finances. This is especially true for those under 65 years of age, who are much more likely to have difficulty meeting their financial commitments than those over 65 (39% vs 22%).
- About 1 in 6 Canadians spend more than they earn (17%).
These results are important to consider because the financial difficulties encountered by a portion of the Canadian population are detrimental to financial well-being according to the FCAC (Financial Consumer Agency of Canada).
Antoine Fruchard, director in chief at Hellosafe.ca
"Finally, examination of official data regarding debt in Canada reveals a far less worse situation than we could have imagined. Indeed, even if deferred mortgage payments of Canadian households rose a lot, some safeguards allow the situation not to be out of control. In fact, report facilities offered by banks and credit lines subscribed by Canadian households acted like a safe exit in some cases. However, the challenge for years to come will be to rebuild step by step the Canadians' capacity to save money and to generate disponible incomes. This could happen only through a successful economic recovery across all the country."
To write this article, we collected data from the Canadian Government, the Bank of Canada and on private banks' reports. The studies to provide these figures were conducted by Statistics Canada, the Financial Consumer Agency of Canada and Desjardins. All the data provided by these organizations are from 2019, which is the most recent that is out on the topic. Estimates for the year 2021 were conducted by the Bank of Canada.
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