High house prices and the mortgage stress test are making it as difficult as it’s ever been to buy a house, but young Canadians are finding other reasons to borrow money these days ― like covering their day-to-day living costs.
The latest “Insights” report from credit rating agency Transunion found the total money owed by Canadians rose 4.3 per cent over the past year, to $1.88 trillion.
Much of that increase came from young people. Among millennials, debt jumped by 12.3 per cent in the past year, to a total of $515.9 billion. That makes millennials’ debt larger than the baby boomers’ for the first time, Transunion noted.
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But it’s not mortgages driving that increase anymore. The number of new home loans issued in Canada dropped by 8.9 per cent in the past year, down by one per cent among millennials and by 12 per cent among Gen-Xers. The dollar value of mortgages to Gen-Z borrowers (age 25 and under) dropped by more than 13 per cent, despite a 46-per-cent jump in the number of mortgages.
Young adults are increasingly using debt to cover their cost of living. On top of auto loans and student loans, they are borrowing for things like paying off other debts or going on trips, said Matt Fabian, Director of Research and Industry Analysis at TransUnion Canada.
“When you think about this age group, one of the things they’re looking at is ... how do I just manage? They’re not thinking long term … They’ve never seen a high interest environment.”
Young adults are turning increasingly to non-traditional lenders and fintech ― online lenders with no brick-and-mortar locations who often advertise aggressive promotions online.
Some are essentially acting as subprime lenders, doling out money at interest rates of 16 to 20 per cent to borrowers rejected by traditional lenders, Fabian noted.
These are the people who would be most impacted by a hike in interest rates, Fabian noted ― though at the moment rising interest rates seem unlikely.
“One of the things they’re looking at is ... how do I just manage? They’re not thinking long term … They’ve never seen a high interest environment.”
Fabian says he wouldn’t be surprised if the idea behind the mortgage stress test was expanded to other kinds of borrowing ― meaning a test, for instance, on car loans or lines of credit.
He notes that Quebec is taking a step to reduce debt levels by requiring a higher minimum payment on credit card balances. The province has set a minimum of 2 per cent of the balance, rising gradually to 5 per cent.
“We’re going to see some types of controls” as Canadians’ debt levels rise, Fabian predicted.