- 69 per cent of all household debt in Canada is made up of residential mortgage debt which helps increase net worth, while 18 per cent comes from lines of credit and only five per cent is credit card debt1
- Canadians have significant equity in their home, averaging about 74 per cent of the home’s value2
- National mortgage-in-arrears numbers remain very low, at less than a quarter of one per cent3
The bottom line
Banks are closely monitoring household debt levels to ensure that Canadian households can successfully manage their debts well. Banks in Canada remain prudent lenders that manage risk carefully, only lending to clients who demonstrate the ability to repay their loans. At the same time the vast majority of Canadians are responsible borrowers who use credit wisely to strengthen their financial futures.
There has recently been much public discussion about household borrowing and debt levels in Canada, and broad agreement that it is an issue meriting close attention. To help contribute to the discussion, the Canadian Bankers Association is providing the following information and facts.
Canadians make wise borrowing decisions
Overall the vast majority of Canadians are responsible borrowers who use credit wisely to strengthen their financial futures. It is important to put consumer borrowing into perspective: the majority of Canadian household debt, 69 per cent, is made up of mortgage debt4 – borrowed money used to purchase a home, a high quality asset which can increase an individual’s net worth over time.
The statistics show that Canadians are managing their mortgages responsibly. A November 2017 study by Mortgage Professionals Canada found that 16 per cent of mortgage holders have increased their mortgage payments and 16 per cent have made an additional lump sum payment in the last year.5 In fact, 34 per cent of mortgage holders (about 2 million out of 5.93 million) have taken at least one action to shorten their amortization periods, including (making lump sum payments, increasing their regular payments to more than is required, or increasing the frequency of payments).6
Canadians also have significant equity in their homes. Canadian homeowners have an average home equity of 74 per cent of their home’s value.7
Lending and borrowing decisions take place in the context of a strong supervisory and regulatory system in Canada. The federal government has made regulatory changes to help households manage debt, including such measures as reducing the maximum mortgage amortizations and introducing improved qualifying criteria.
Responsible credit card use
Credit cards are a convenient payment tool, used responsibly by the majority of Canadians. More than half (58%) of Canadians pay their credit card balance in full each month, avoiding credit card debt and interest payments altogether.8 And credit card delinquency rates remain low, at only 0.88 per cent of total outstanding balances as of January 2018.9 According to the Bank of Canada, credit card debt only makes up five per cent of total household debt in Canada and credit card debt has remained stable over the past year.10 Credit card default rates are lower than U.S. levels.
Banks are prudent mortgage lenders
Banks take their role as mortgage lenders very seriously, adhering to prudent standards and ensuring consumers only take on manageable levels of debt. This is clearly evident when looking at national mortgages-in-arrears numbers for Canada’s nine largest banks, which show that less than a quarter of one per cent of homeowners have gone three consecutive months or longer without making a payment, significantly less than in the United States.11
Mortgage debt has been growing and this growth has been driven by a variety of supply and demand forces in the housing market. House prices have almost doubled in the past decade, requiring home buyers to borrow more to finance their homes.
Today’s historically low interest rates have started to rise. Banks take this into account and ensure potential borrowers are able to make future payments under higher interest rate conditions. For example, for insured mortgages – where a borrower has made a down payment of less than 20 percent of the home’s value – banks require that the borrower qualify using the Bank of Canada's five-year benchmark rate, which is typically one to two percentage points higher than the borrower’s contractual mortgage rate. Similarly, for uninsured mortgages – where a borrower has made a down payment of 20 percent of the home’s value or more – banks require that the borrower qualify using the Bank of Canada's five-year benchmark rate, or the borrower’s contractual mortgage rate plus two percent, whichever is higher. For both mortgage types, these “stress tests” ensure that borrowers can continue to comfortably make mortgage payments even if interest rates rise.
Banks provide advice on debt management
Banks are closely monitoring their customers’ borrowing to ensure that debt levels are manageable. Every family has unique borrowing needs and the amount of debt they feel comfortable carrying can also vary. Banks can provide the financial advice that is right for each individual customer.
Banks do not want to see their customers in financial difficulty. Canadians who think their debt is becoming unmanageable are encouraged to speak with their bank as early as possible so they can get the help they need. Banks are often able to help their clients work through financial problems by offering advice, debt counselling and flexible loan arrangements.
Helping Canadians Save
Banks also offer Canadians many different tools to help them save and invest their money for short-term or long-term needs. From tax-free savings vehicles to GICs to high-interest savings accounts, banks have their own unique programs to help their customers save and manage their money. Many banks also offer services such as savings programs that transfer money from chequing to savings accounts automatically, savings calculators and help and advice in achieving specific savings goals.
1 Bank of Canada, Banking and Financial Statistics, December 2017. Data is for Chartered Banks only.
2 Statistics Canada National Balance Sheet Accounts Third Quarter 2017
3 CBA statistics, Residential Mortgages in Arrears
4 Bank of Canada, Banking and Financial Statistics, December 2017
5 Mortgage Professionals Canada Annual State of the Residential Mortgage Market in Canada, November 2017
7 Statistics Canada National Balance Sheet Accounts Third Quarter 2017
8 Abacus Data for the Canadian Bankers Association (CBA), December 2016
9 CBA, Credit card Delinquency and Loss Statistics
10 Bank of Canada,Banking and Financial Statistics, February 2017
11 CBA statistics,Residential Mortgages in Arrears