Household Borrowing in Canada
- 68 per cent of all household debt in Canada is made up of residential mortgage debt which helps increase net worth, while 20 per cent comes from lines of credit and only five per cent is credit card debt1
- Canadians with mortgages have significant equity in their home, averaging about 66 per cent of the home’s value2
- 64 per cent of Canadians pay off their credit card balance in full each month, avoiding credit card debt and interest payments altogether3
- National mortgage-in-arrears numbers remain very low, at less than half of one per cent4
The bottom line
Banks are closely monitoring household debt levels and the economic recovery in Canada to ensure that Canadian households can 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 been much public discussion recently about household borrowing and debt levels in Canada, and broad agreement that this is a matter that merits close attention. To help contribute to the discussion, the Canadian Bankers Association is providing the following information and facts.
Overall the vast majority of Canadians are responsible borrowers who use credit wisely to strengthen their financial futures. And it is important to put consumer borrowing into perspective: the majority of Canadian household debt, 68 per cent, is made up of mortgage debt5 – 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 2011 study by the Canadian Association of Accredited Mortgage Professionals (CAAMP) found that 22 per cent of mortgage holders have increased their mortgage payments and 18 per cent have made an additional lump sum payment in the last year.6 Moreover, a 2011 study by the Canada Mortgage and Housing Corporation (CMHC) found that:
- 75 per cent of recent home buyers feel it is very important to pay off their mortgage as soon as possible and 39 per cent of recent buyers have their mortgage payment set higher than the minimum required.7
Canadians also have significant equity in their homes. Among homeowners with mortgages, the average amount of home equity in Canada stands at 66 per cent of total home value.8
Lending and borrowing decisions take place in the context of a strong 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.
Credit cards are a convenient payment tool, used responsibly by the majority of Canadians. Two-thirds of Canadians pay their credit card balance in full each month, avoiding credit card debt and interest payments altogether.9 And credit card delinquency rates remain low, at only 0.87 per cent of total outstanding balances as of October 2012.10 According to the Bank of Canada, credit card debt only makes up five per cent of total household debt in Canada and there has been virtually no growth in unsecured debt in the past two years. Credit card default rates are half of U.S. levels.
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 half of one per cent of homeowners have gone three consecutive months or longer without making a payment.11
Mortgage debt has been growing and this growth has been driven by the housing market, not changes in bank lending practices. House prices have more than doubled in the past decade, requiring home buyers to borrow more to finance their homes.
As the global economy stabilizes, today’s historically low interest rates will inevitable rise. Banks take this into account and ensure potential borrowers are able to make future payments under higher interest rate conditions. For example, for variable rate mortgages, banks normally assess borrowers using a five-year term interest rate so that the borrower could continue to make mortgage payments if interest rates go up.
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.
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.