Growing Concern Over Subprime Borrowing in Canada

subprime mortgages written on black sheet and calculator and mini house on desk

A recent report from TransUnion Canada highlights a significant increase in subprime borrowing during the last quarter. This uptick is causing worry about its potential impact on Canada’s economy and real estate market.

What is Subprime Borrowing?

In Canada, a credit score below 660 often qualifies for subprime borrowing, leading to higher interest rates. Factors like low income, high debt, or past bankruptcy also play a role.

Acceleration in Subprime Borrowing

TransUnion’s latest data reveals that the number of subprime borrowers has increased by nearly 9% over the last year, reaching 2.64 million people. This growth rate is double that of near-prime and prime borrowers and four times faster than above-prime borrowers.

The State of Canadian Debt

In the second quarter, outstanding credit balances for Canadian borrowers rose by over 3%. Household debt saw a 4% increase, amounting to $2.3 trillion. Higher debt levels and increasing interest rates are contributing to elevated minimum payments, adding financial stress for many consumers.

Lenders Still Lending

Despite the inherent risks, lenders continue to extend credit, even to subprime borrowers. TransUnion reported a 16% increase in below-prime loan originations this quarter, as opposed to a 6% rise for those with better credit scores.

Implications for Canadian Real Estate

Experts argue that Canada’s real estate market doesn’t face the same subprime issues as the U.S., thanks to federal regulations. Rob Aitken, an associate professor at the University of Alberta, describes Canada’s economy as stable, particularly in comparison to other global economies.

Mortgage Payments on the Rise

The Bank of Canada has warned about potential increases in mortgage payments due to rising interest rates. Borrowers renewing their home loans could see their monthly payments jump between 20-40%. Already, new data shows homeowners are facing financial stress, with longer loan amortization periods becoming more common.

Final Thoughts

While Canada’s financial system remains robust, the increase in subprime borrowing and household debt could put pressure on the economy and the real estate market in the long run.

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