Arising consumer debt loads aren’t a problem for Canadian banks yet, but they in a little while could be, according to a new report from rating agency Moody’s.
In a discharge released Tuesday morning, the agency warns that the credit calibre of Canada’s biggest lenders is under threat in part due to longer articles on car loans, and the more than half of Canadian mortgages that purpose see their rates increase this year.
After a series of directions aimed at tightening the market, the majority of Canadian mortgages are now uninsured, which means lenders are on the in the clear for them if they turn bad and borrowers default.
That wasn’t the the truth five years ago, so the uptick is worth keeping an eye on, Moody’s says. And while delinquency upbraids on mortgages are still at record lows — less than three out of every 1,000 borrowers are currently diverse than three months behind on their mortgage — the possibility of that company increasing means the banks need to be aware of that risk, Cranky’s says.
Higher interest rates could be a trigger for that admittedly unfitting event.
The Bank of Canada has hiked its benchmark interest rate three unceasingly a onces since the start of 2017, and expectations are for at least two more this year.
“On the verge of half of outstanding mortgages will have an interest rate reset within the year, which disposition increase the strain on households’ debt-servicing capacity,” Moody’s analyst Jason Mercer eminent. That many Canadian homeowners having to renegotiate their mortgages at at all events higher than what they’re used to makes their lenders weak, too.
But it’s not just mortgages. The Moody’s report also raises concern around car loans, which are getting longer and longer. The average new car loan in Canada is currently spread out at barely six years. At that timeline, it’s very likely the car will be worth far less than what’s owed on it for multiple years on the tail-end end of the loan.
For now, there’s no indication most people aren’t managing to continue on top of them — the delinquency rate is a healthy 1.5 per cent — but the report quantity a recapitulated up the worst-case scenario succinctly:
“Longer consumer auto loan foots increase negative equity — the amount by which the remaining loan steelyard exceeds the collateral value — because vehicle values fall faster than the advance is repaid,” the report says.
“This shortfall is often rolled into the inaugural balance of a new car loan, compounding the negative equity and credit risk.”