Seniors the first to crack as rising rates crank up debt stress

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The storyline that debt levels in Canada are big but manageable is starting to unravel.

Oddly, it’s seniors who are showing the first signs of serious debt stress. In the second-quarter edition of its National Consumer Credit Trends Report, the credit-monitoring company Equifax reported yet another year-over-year decline in the percentage of people falling behind on their debts. The one group to buck the trend was seniors.

The overall delinquency rate for non-mortgage debt fell 3.1 per cent in the second quarter compared with the same period of 2017. Among people aged 65 and older, the delinquency rate jumped 4 per cent.

“We actually think that’s the start of some of the impact of higher interest rates,” said Bill Johnston, vice-president of data and analytics at Equifax Canada. Seniors, with all their life experience and their fixed retirement incomes, are the last group you’d expect to see leading a trend in debt vulnerability. A reason why this is happening is that they borrow differently than people in other age brackets.

Mr. Johnston said 55 per cent of non-mortgage debt for seniors is in lines of credit, compared with 43 per cent of the rest of the population. Credit lines are at the sharp end of interest-rate increases. When the Bank of Canada raises its benchmark overnight rate and major banks respond with identical increases in their prime lending rates, credit lines are immediately adjusted higher. Variable-rate mortgages, too. The rise in delinquencies for seniors is notable because this is a demographic that looks comparatively good on debt management. The actual delinquency rate in the second quarter was 1.1 per cent overall and 0.9 per cent for seniors. The average debt was $23,271 for all and $16,086 for seniors, the lowest of any population group outside 18- to 25-year-olds (their average debt was $8,454).

Another oddity is that while delinquencies by seniors have risen, the demographic groups you’d expect to be under the most pressure are doing well. The biggest year-over-year drop in the delinquency rate for any group tracked by Equifax was for 36- to 45-year-olds, at minus 4.9 per cent.

The second biggest drop in delinquencies was among 26- to 35-year olds, at minus 4.6 per cent. For now, people getting into the housing market and then starting families are staying on top of their debts.

Could it be that younger people have been more sensible than seniors about taking on debts that they can handle? Remember, retiring with debt is still a newish phenomenon. It’s possible that people are complacently carrying debt into retirement and then finding it’s not as manageable as it was in their younger years. Question for further study: Are seniors going into debt to pay for their own consumption, or to help their adult children buy houses and cover expenses?

There’s just the faintest hint of debt stress in the broader population. While the delinquency rate dropped on a year-over-year basis in the second quarter, it rose to 1.1 per cent from 1.08 per cent from the first quarter to the second.

Mr. Johnston found another sign of debt stress in the falling proportion of people paying their card bills in full. Fifty-seven per cent paid in full in June, compared with 58.6 per cent in the same month of 2017.

The average non-mortgage debt rose 3 per cent in the second quarter on a year-over-year basis. Overall growth in credit seems to be slowing, but there’s still strong demand for loans for big-ticket items such as cars and home renovations.

How this plays out in delinquencies will depend on two things, the first being interest rates. It’s quite likely borrowing costs will rise after the Bank of Canada rate-setting announcement on Oct. 24, and more increases are possible.

The pace of debt growth also has an effect on the delinquency rate. A modestly rising number of delinquencies can be masked if people are rushing to sign up for new credit lines, credit cards and loans.

Mr. Johnston said Equifax sees delinquency numbers edging higher, rather than surging. “I don’t think we fall off a cliff without a recession.”