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Monday, September 27, 2021

Pattie Lovett-Reid: Let the borrowing begin – responsibly

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HUNTSVILLE, ONT. — New findings from a TransUnion Canada Credit Industry Report highlight how our borrowing patterns are on the rebound, inching closer to pre-pandemic levels.

Driving this newfound enthusiasm for consumer credit are the relaxed restrictions as the Canadian economy gradually begins to reopen. However, the biggest dollar impact can be found in mortgage originations driven by a strong housing market and low interest rates. Mortgage balances increased 8 per cent year over year.

However, the growth in the mortgage market wasn’t evenly distributed across risk tiers.

Think back to June 2018 when the Office of the Superintendent of Financial Institutions (OSFI) introduced higher qualifying rates.The qualifying rate on uninsured mortgages – where the down payment is 20 per cent or more – changed to two percentage points above the contract rate, or 5.25 per cent, whichever is higher.

The result of the new rules has shifted the high bar, according to TransUnion, to the majority of new mortgages being from those homeowners with great credit scores – 760 or higher, considered to be the top-tier mortgage borrowers. Above-prime mortgages are up 53 per cent year over year, while subprime mortgages declined 31 per cent year over year, largely due to the new rules.

The mortgages rules implemented in 2018 simply made it harder for some to qualify for a mortgage until they saved up more of a downpayment.

This isn’t considered bad news, although it’s disappointing for some trying to get into the housing market maybe a bit financially prematurely.

The biggest per cent increase year over year was in unsecured loans on the back of strong demand and shift in preference toward pick-up trucks, SUV and luxury vehicle brands adding to a 3.3 per cent increase in auto loans.

There is good news in the report. Seventy per cent of Canadians surveyed are feeling pretty good about their financial outlook while some still remain cautious about adding to their debt. Only 21 per cent plan to apply for a new credit or refinance existing credit facilities for the balance of 2021.

As Canadians worked hard to pay down debt, delinquencies were also down across all credit products. In fact, as the pandemic unfolded throughout 2020, TransUnion found delinquencies ( payments 90 or more days past due for credit cards and 60 or more days past due for all other debt products) were down by 0.63 per cent year over year to a ridiculously low level of 1.96 per cent.

I’m so encouraged by these numbers.

In fact, according to Matt Fabian, director of financial services research and consulting at TransUnion, 46 per cent of those surveyed have reduced their discretionary spending and 20 per cent said they paid down their debt faster.

Have Canadians reined in their wild pre-pandemic spending habits? Time will tell.

The irony of the pandemic was that some households living very close to the margin became more flushed with cash due to record savings as COVID-19 restrictions were put into place, leaving few places to spend money, government subsidies and lender deferrals. In fact, TransUnion says households accumulated $184B in gross savings between Q1 2020 and Q1 2021 and are estimated to have used $22B to pay down debt during the pandemic.

In a strange sort of way, this pleases me. There is absolutely nothing wrong with borrowing money in a responsible manner. I appreciate there is pent up demand and consumption will likely start to tick higher, however, we aren’t there yet.

The Delta variant of COVID-19 is still a wild card.

However, as vaccines take hold and as the economy ramps up with employment rates moving higher and interest rates remaining low for now, lenders should be ready for the increasing demand for new credit.

My analogy for this borrowing environment is: borrowers were forced to come to a full stop by a red light – in this case a pandemic. There are now signs pointing to a ‘proceed with caution’ or yellow light as fear of a renewed outbreak lingers in the background. And because of this the reality is we still don’t have a green light on spending suggesting full speed ahead.

In other words, your household balance sheet has likely had significant financial repair over the past year, given the numbers highlighted by TransUnion.

Try not to let your emotions dictate your borrowing decisions as we inch closer towards a full economic recovery. Proceed with caution.

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