Moody’s Investors Services joined the Bank of International Settlements (BIS) and S&P Global Ratings this month warning that Canada’s banking system, dominated by the Big 5, is facing a growing threat of souring consumer loans amid rising interest rates. Canada’s ratio of household debt to disposable income reached a record 171 percent in Q3 of 2017. The proportion of uninsured mortgages has also increased 60 percent from 50 percent five years ago. The credit quality of Canada’s biggest lenders is under a triple threat of unsecured credit card portfolios, longer tem car loans and the fact that more than half of Canadian mortgages will see their interest rates increase this year.
As a collection agency Edmonton, collection agency Calgary and collection agency GTA we are watching with keen interest the unfolding of events with respect to these phenomenon and their impact (or lack thereof) on Canadian credit markets.
Canadian Mortgage and Housing Corp (CMHC), a government agency (or in other words something the taxpayers are on the hook for), insures the bulk of mortgages in Canada. Almost half of these outstanding mortgages, many of them on fixed-rate terms, will be subject to an interest-rate reset within the next year, increasing the strain on households’ debt-servicing capacity.
After a series of new rules over the last couple of years aimed at tightening the housing market, the majority of Canadian mortgages are now uninsured, which means lenders alone are on the hook for them if they turn bad and borrowers default.
While delinquency rates on mortgages are still at record lows (less than three out of every 1,000 borrowers are currently more than three months past due) the possibility of that number increasing in the current rate environment means the banks need to be aware of the risk. Higher interest rates could be a trigger for that admittedly unlikely event. The Bank of Canada has hiked its benchmark interest rate three times since the start of 2017 with expectations for at least two more this year.
Further aggravating the current risk faced by Canadian banks are auto loans which are being offered at terms as long as 68 months! With these longer terms, the car’s market value will most often drop below the amount owed on the loan before it’s paid off. If it’s ever paid off!
We see first-hand the egregious number of sub-prime borrowers already over indebted and unable to meet previous obligations and in collections qualifying for high interest, long term auto loans that we know, they stand no chance of honouring the terms and completion except in the event of a major lottery win.
Add on top of the above unsecured credit-card portfolios, which will be the first to feel the pinch as their repayment tends to have lower priority for financially strapped borrowers, and we have the perfect recipe for a major dumpster fire in Canadian credit markets.