(Bank of Canada Report) The Credit Score Signal Every Homeowner Needs to Catch Now

Added: 2026-05-30

[00:00:00]The Bank of Canada just published a paper with a really ominous title. It's called Consumer's Path to Mortgage Delinquencies. And it gives us a bit of a warning sign and understanding on how people go delinquent in their mortgage.

[00:00:09]And that the actual signal starts about 2 years before the mortgage payment gets missed based on their data. The researchers looked at the full universe of TransUnion Canada borrower credit data from 2015 to 2024, and their findings were pretty simple and also very uncomfortable. Future mortgage delinquencies usually show up first in credit cards, lines of credit, and other consumer debt, which we know are all rising right now. The borrower in Canada protects the mortgage as long as they possibly can. They lean on the credit card, they use the line of credit, they miss smaller payments that have less consequences, and then eventually the mortgage finally breaks. This means that mortgage delinquencies are often the last visible symptom, not the warning sign for what's going to happen in Canada's housing market. In this video, I'm going to show you the entire 2-year timeline. I'm going to try and skip over a bunch of the really brilliant math that they did that is hard for the average user to get a a grasp for. I'm going to show you a couple of charts that make the warning sign obvious to spike might mean that we're already late in the housing correction or cycle.

[00:01:19]The paper is called Consumer's Path to Mortgage Delinquency. It is a Bank of Canada staff analytical paper. So, this is staff research, not an official rate decision or from the governor's or the governing council of the Bank of Canada.

[00:01:31]I'm going to go through a couple of things that they just released. They just released their f financial stability report and a couple of others.

[00:01:36]So, hit the subscribe button if you want to catch those. The data set that they went through is huge. TransUnion Canada credit data from 2015 to 2024, more than 9 million mortgage holders, over 100 mortgage lenders, roughly 80% of all household mortgages in Canada are included in this data set. So I would say the conclusions are probably relatively accurate. The researchers found three major patterns. First, about 2 years before a mortgage goes delinquent, future delinquent borrowers start using more revolving credit, mainly credit cards and lines of credit.

[00:02:06]Second, one or two years before the mortgage delinquency, mispayments start showing up on non-mortgage products.

[00:02:12]Credit cards tend to show stress first.

[00:02:14]Third, in the final 6 months before the mortgage delinquency, the stress accelerates. non-mortgage delinquencies rise faster and credit utilization rises faster. The paper says that credit card arars utilization and the interaction between utilization and the credit score carry a lot of predictive power. The key takeaway for regular people is basically just that mortgage stress usually leaks out somewhere else first. And you want to pay attention to those indicators if you want to see if we're going to see more mortgage stress ahead, which it looks like based on the data we probably will. And so the takeaway for real estate agents or real estate investors is maybe even a bit more useful that the official mortgage delinquency number is usually late. It would be a lagging indicator. If you want an early read, go look at consumer credit. Canada's mortgage market isn't some small niche corner of the financial system. The paper says that as of November 2025, outstanding residential mortgage debt in Canada was approximately $2.4 trillion.

[00:03:10]That is nearly 73% of national GDP and about 74% of total household debt. So when mortgage borrowers get stressed, the damage spreads past the borrower. It becomes a household balance sheet story.

[00:03:23]House prices decline. Incomes get impacted. Bank earnings get impacted.

[00:03:29]It's a banking story. It's a housing demand story. It's a monetary policy transmission story. It's a a government policy story. As we're learning, this is why the Bank of Canada cares and why they're paying attention to this and doing staff papers on this stuff. A household missing a mortgage payment is usually the end of a long chain. Before that mispayment, there are months of smaller, less consequential decisions.

[00:03:53]Do we carry more debt on the credit card? Do we use the line of credit? Do we skip the card payment to protect the mortgage? Do we stop spending? As somebody listening to this, you probably already know intuitively that this is how it happens. But it's very interesting to see it represented in data.

[00:04:08]Do we slow our spending? Do we sell something? Do we refinance the house, you know, before our credit gets impacted by non-payment and we can't refinance? Do we ask our family or friends for help? That chain of events matters because mortgage delinquency is expensive. It damages your credit. It can lead to for sale or foreclosure.

[00:04:26]Households usually protect the mortgage until they run out of options. And that's the whole reason that the consumer credit signal works. People don't usually go from totally fine to missing the mortgage overnight. Stress builds through the rest of the balance sheet first. The mortgage payment is usually the last domino and the credit card is where people start to wobble.

[00:04:47]This paper is useful because the data set is not small at all. The researchers use the entire TransUn Union Consumer Credit Bureau data set from 2015 to 2024. It includes 9 million mortgage holders, more than 100 mortgage lenders.

[00:05:00]The paper says that it represents roughly 80% of household mortgages in Canada. This lets them follow borrowers month by month across different credit products, mortgages, credit cards, auto loans, installment loans, helocks, unsecured lines of credit. They're looking past just the mortgage in isolation and into the full credit profile to see how people got there to understand the story of what gets us to the point where people actually fail to pay their mortgage. And this is really the right way and the important way to think about household stress. A household stress does not experience debt product by product. It it has one cash flow problem spread across multiple lenders and it gradually takes time to get there. It brings you back to that Hemingway quote. How do we go bankrupt?

[00:05:43]two ways. Slowly and then all of a sudden, and the slowly part is what they're observing in a lot of this data.

[00:05:49]The bank might see the mortgage, the credit card lender sees the credit card, the auto lender sees the car loan, the borrower feels all of these things at the same time when they have to service their their debt payments on a monthly basis. And this is the mistake that people make when they only quote mortgage arers. Mortgage reers are clean and they're easy to explain and they are obvious in their relevance to the real estate asset class, but they're also late. they're a lagging indicator because of everything that happens before that. And if you wait for just the mortgage number, you miss a lot of the early stress moving through the rest of the household balance sheet that gets us to this point. So you can anticipate trends in the real estate sector. Chart one is the money chart from from this report. It shows credit utilization on revolving products, mainly credit cards and lines of credit rising for borrowers who later become mortgage delinquent.

[00:06:35]The key timing is more than 24 months before the first mortgage delinquency event. It's a long runway. This means that the borrower can look current on the mortgage while their consumer credit profile is already deteriorating and their credit actually might be getting worse, which makes it, you know, it really starts to shut off the exits cuz they can't refi out. They can't take on more debt because nobody wants to lend money to somebody with bad credit. The mortgage at this point still looks fine, but the stress is already moving through to that borrower. And the paper says that future delinquent borrowers start relying more heavily on consumer credit roughly 2 years before mortgage delinquency. Two years. Which means that all of the financial stress that we're hearing about today, uh, Oby talking about 150,000 borrowers that could see mortgage stress, all of this stress, you know, you think about the renewal wall and it's going to be a year or or sorry, a month or two months before the person actually um starts to experience financial stress and can't pay things and then goes delinquent. when it's actually based on this data up to two years. This means that the the actual pain that we're experiencing as a result of what we're seeing in Canada's housing market right now is not even close to over if we're still seeing credit card delinquencies rise, auto loan delinquencies rise, etc. And this chart shows us what a household does when cash flow gets tight. They start to borrow from the easiest places first. Credit cards are immediate. You just go pay for your groceries with a credit card instead of cash. Lines of credit are a little bit more flexible. the mortgage is protected because missing that payment has bigger consequences and it's a much bigger application to go and get a bunch of debt back out of your house to try and pay for the you know things that you need in your life. So the household starts using short-term expensive flexible credit to defend the long-term secured debt and that can work for a while and a lot of people do it under the assumption that they'll eventually be able to solve their way out of that problem. But it can also hide the problem and that is the dangerous part that they discuss in this report. From the outside, the mortgage market can look very stable while household liquidity is weakening underneath it. And I think, you know, the bigger question becomes like why are they studying things like this right now? Are they concerned that that's actually the case? And people can still be making the mortgage payment because they're slowly exhausting every other part of their balance sheet or the credit that they have available. And if the credit card is becoming the shock absorber of the mortgage, the household is probably already financially stressed and eventually going to run out of options. The second pattern is that non-mortgage delinquencies lead mortgage delinquencies. Again, these things are obvious. You know this, but it is very interesting to see it represented in data across 9 million mortgages. The paper says that between 1 and 2 years before the first mortgage delinquency event, delinquency rates on non-mortgage products start rising. Credit cards show the earliest increase. Then stress appears across other products like auto loans, HELOCs, personal lines of credit, and installment loans. This makes sense.

[00:09:24]A mortgage is secured by the home.

[00:09:25]Missing it has big consequences. You know, for if you miss your credit card, there are consequences, but the immediate cost is smaller. If you miss your auto loan, they take your car away.

[00:09:33]If you miss your mortgage payment, they take your house away. These are bigger consequences, and people tend to push them further down the line in things that they're going to go delinquent on.

[00:09:41]So, when a household is under pressure, the payment hierarchy gets revealed.

[00:09:45]They protect the house. They protect shelter. These are necessary things for human survival. They protect the largest secured debt. then the smaller obligations start to slip first. This is why consumer credit delinquency is such a useful warning signal. It shows the household's payment priority under stress. There's a policy angle here too.

[00:10:03]Like if officials are only watching mortgage ar if you're only looking at mortgage rears, it's really easy to just assume that the system is healthier than it feels. Like you always hear people talk about how delinquencies are historically low and you know even though they're up 2 3x off the bottom there it's still super low in the grand scheme of things.

[00:10:24]But if credit cards, auto loans and lines of credit are already cracking the mortgage market might simply just be something that we hit down the line. And I think a lot of people who are white knuckling it through this credit environment are telling themselves that they'll get bailed out by rates or prices or whatever at some point in that 2-year period that maybe they're starting to create by going delinquent on loans. So the borrower hasn't defaulted on the mortgage yet, but the household is already telling you that it's running out of room. And chart three is where this slow warning becomes a fast warning sign. So the paper says the upward trend in non-mortgage delinquency and credit utilization intensifies as the mortgage delinquency date approaches. So for future delinquent borrowers, the credit card delinquency rate increases by as much as 20 percentage points. Credit utilization rises by about 6 percentage points on average as the mortgage delinquency event nears. That is the final 6-month acceleration. This is important because stress is not linear. As you can see, it's like I guess kind of exponential.

[00:11:23]Savings cover up part of it. Then credit covers part of it. Then spending gets cut. Then payments get juggled. Then eventually people run out of room. Their buffers run out. And once your buffers are gone, the speed changes. And that's what this chart is showing. The borrower moves from managing stress to completely losing control of it. This is also where a lot of housing commentary gets sloppy.

[00:11:42]People say delinquency rates are still low, so everything is fine. But what if we're just at the flat part of this curve before we've gotten to the ramp up? And like as a result of that, low delinquency can be very true. While early stage stress is getting worse, but the better question goes past how many people missed the mortgage last month.

[00:12:02]The better question is how many households are using consumer credit to avoid missing the mortgage 6 months from now. The paper then builds a model to estimate the probability of future mortgage delinquency over the next 6 months. And the model uses things like credit card rears, credit utilization, credit score, utilization squared, and the interaction between utilization and credit score. The important part is the she decomposition.

[00:12:24]So basically the interaction between utilization and credit score accounts for 34.5% of the model's explanatory power. Credit score accounts for about 30%. Credit card or rears account for about 18%. The paper says that behavior features including utilization patterns and arars account for over 70% of total variation. So a borrower's static credit score matters because it is a determination of their options. how likely a bank is to lend to them. So, of course, it matters, but their change in behavior matters a lot. A person with a decent credit score who suddenly starts maxing out revolving credit is giving you new information. And the change, the direction of travel is what they're paying attention to in this data set.

[00:13:07]And it's a real analytical point that that risk isn't like this slow predictable thing. It's dynamic. It moves. if somebody loses a job or their mortgage payment jumps up by $500 a month or they had to just close on a pre-construction condo that they're now paying $1,000 a month cash flow negative on or whatever the household balance sheet changes materially in some major way before the official delinquency event. And anybody in the real estate industry should care a lot about the movement more than the label the the uh mortgage delinquency numbers like the credit score tells you where the borrower has been what they did in the past but the utilization and aars tell you what is happening now. The authors also tested this model out of a sample from January 2020 to December 2024 and that is a useful period I think to test a model because it includes a very weird credit environment. You had the COVID shock, you had government supports, ultra- low rates, housing boom, inflation, rapid rate hikes, renewal stress. And the paper says that the model maintains a high degree of predictive accuracy beyond the estimation window and closely tracks realized mortgage delinquency through major macroeconomic and financial disruptions. That's their exact language. So when you think about more disruptions like a trade war or a actual war or an oil price shock or stagflation or higher for longer rates or whatever that you whatever wrench you want to throw into Canada's economy that's your macro thesis for what's going to happen over the next little bit. The model is probably going to be relatively accurate. I can't see any wrench being more of a volatile environment than that four-year period that they tested it. um and it came back relatively accurate during the pandemic. So you could say that consumer credit stress reliably leads to mortgage stress in normal periods and in weird economic periods.

[00:15:01]And this is what makes all of those other credit products very useful as a warning signal. This is why CHC has been publishing their non-mortgage loans 90 days plus delinquent and how it's back to rates above 2014 in their most recent residential mortgage industry report.

[00:15:16]And you can see that your auto, credit cards, lines of credit, helocks, mortgages are all going delinquent at increasing rates. And so the Bank of Canada is observing this recurring credit sequence. It's not this thing that happens over one cycle. They went back, you know, uh, 11 years or something, 9 million mortgages. And so the authors argue that the behavioral relationships are structurally stable over time. So for somebody who analyzes housing for a living, this is important to me. For a lender, this matters. For a policy maker who is setting interest rates or deciding how to spend a government's money, this probably matters. For an investor trying to figure out whether force selling pressure is actually building or whether, you know, we're close to the bottom or at peak stress, this stuff matters. It's not a perfect signal. No model e economic models are imperfect by their nature. I mean, humans are human.

[00:16:08]We're animals. We're just going to do, you know, all these other things. But it's as close as you're going to get and as as substantial as you're going to get from a data perspective and it gives you a better early read than waiting out the mortgage delinquency number after the household has already been broken. The paper also checks the finding by ma matching transions data with OIE regulatory mortgage origination data that adds underwriting variables like loan to value and mortgage debt service ratio. And the result in that is interesting. A higher mortgage debt service ratio at origination is positively and significantly associated with future delinquency risk. Again, you would know this. If your mortgage payment is high relative to your income, you're at higher risk of going delinquent. It's intuitive, right?

[00:16:48]Higher debt service pressure creates more fragile household finances. Loanto value at origination, however, is not statistically significant in this model.

[00:16:58]And that part actually surprised me. Um the authors give a couple of reasons and I'll talk I'll I'll talk about mine as well but you know their their analysis doesn't distinguish between insured and uninsured mortgages. Also house prices move after origination. So the original loan to value can become stale as a measure of current equity. It can go up like it did from you know uh 2015 to 2020 or it can go down like it did from 2022 to present day. Uh the price can go up or down. The loan to value would go up if the price goes down. But I, you know, I you we talk about Canadian mortgages as if um like more equity creates this ATM environment where people can pull it pull it out and then use it to deploy in the um like to solve their debt problems. And it actually turns out that at least on the loan to value side, you know, the original mortgage file is not the household's current reality. And so the borrower's cash flow change, rates change, expenses change, the home's value changed, the consumer credit profile changed. A loan can look very safe at origination and become risky later because the household's liquidity deteriorates, they lose a job, things get too expensive, inflation crushes their uh disposable income and their ability to pay the mortgage. And so this is why they've determined through this study that uh dynamic credit behavior and what happens like over the life of the mortgage matters so much and they pay um more attention to these other things rather than the loan to value or debt service coverage ratio. So for homeowners, the takeaway is pretty straightforward.

[00:18:17]Don't treat credit card balances as a harmless bridge if they're being used to defend your mortgage payments. There's a difference between normal spending and using revolving credit as a life support system. If your utilization rate is rising every month, if you're carrying balances longer, if you're using lines of credit to cover normal expenses, the warning light is already flashing. And I think a lot of people think like selling their house would be the last line of defense. But those things are early warning signs. than usually selling your house. I mean, had you if you were one of these people 2 years ago, had you sold your house, you would have netted like 15% more on your house price than 2 years later when your mortgage is starting to go delinquent and it's power of sale and your credit's destroyed and you won't be able to buy a house and it'll be tough for you to get a rental.

[00:18:59]Um, people should pay attention to this stuff and you know, the practical way that you can do that is um it's boring, right? It's but it's I I have always found like you know um I've worked out for like 15 years and I find like the it's a boring stuff just doing it over and over that actually accomplishes stuff. Know your mortgage renewal date.

[00:19:21]Know how much your mortgage payment is going to go up. And I'm going to talk about in another video the Bank of Canada's financial stability report and how they talk about holders of fixed mortgage payments seeing large increases at renewal. Know what your payment shock is going to be if you're up for renewal this year. Be prepared for it. Know your unsecured balances. Know which expenses are flexible and which are structural.

[00:19:44]Talk to your lender before you miss payments if you need help, not afterwards. And don't use credit cards to pretend that a mortgage payment is affordable if the income isn't there. We have this like um thing in Canada where we just like don't want to have to sell our house. We don't want to have to fail to pay our mortgage. But if you're using all of those other things and racking up debt on those other things, it will eventually materialize in more stress on your on your mortgage. It it there's no economic direction that tells me that it's going to be easier to pay debt over the short term than it is today. And so even like I don't see a reason for optimism, but like the math of your debt situation doesn't really care about optimism either. For buyers, this is a reminder that qualifying for the mortgage is not the same thing as surviving the mortgage. A lender can approve you at a point in time. Life keeps moving after closing. Inflation gets crazy. Cost of everything is going up right now as a result of oil price shocks moving through the most most goods. Even though it sounds like we've got a deal in Iran, we've heard that many times already. And I'm more of the opinion that this is going to be a sustained issue and it's sort of out of control. And so if the the the deal that you're doing, if the purchase only works with the perfect income, perfect expenses, both uh partners having a job, and like no surprises, I think that's a fragile and probably too high-risisk deal for most people to be doing in an economy like this. For investors, I think this paper is useful because it gives you a better way to think about future mortgage distress. Watch consumer credit, watch credit card delinquencies, watch auto loans, watch lines of credit.

[00:21:14]I've already done a video on on um CH's uh residential mortgage industry report and they document all these things and I talk pretty substantial about it. I also try and cover Equifax's quarterly reports where they get uh they put this data out a little bit further ahead. Um pay attention to the areas where households are highly levered and income is under pressure, most notably the greater Toronto area. So mortgage arers are going to get higher. they'll get the headline later, but consumer credit already shows the pressure earlier. And so the report tells us that we can use this to anticipate what might show up later. For realtors, I think this changes the client conversation. Like if a buyer's stretching, the question can't stop at did you get a pre-approval or did the bank approve you? It's like what happens if life gets 10% worse? What happens if everybody everything gets 10% more expensive or if one of you loses a job or if your interest rate goes up 5% on renewal? Have you stress tested those scenarios? What happens if your hours get cut? What happens if the renewal payment is way higher than expected or if your credit card balance is already creeping up before closing? I'm not trying to fearmonger, but like data tells us that this is basic risk management that we need to be paying attention to in Canada's econom economy.

[00:22:28]So the bigger point here, Canada talks about housing stress like it starts with house prices, but for households it often starts with cash flow. You know, house prices matter, interest rates matter, wages matter, taxes, insurance, condo fees, repairs, child care, food, cars, whatever. Everything matters. But the household experiences, all of that as a monthly squeeze, right? It's all the money that they have to put out. And if those costs are going up and they have to start taking on debt to be able to afford them, when that squeeze starts, they usually will protect the mortgage. We can see this in the data now. That means that the early signal shows up in the flexible debt first.

[00:23:03]This is why Canada can have low mortgage delinquency rates and still have rising household stress rates and probably evidence that we'll see increasing mortgage delinquency rates. As it stands right now, data tells us that the stress is sitting one or two layers away from the mortgage. Right? Credit cards are the shock absorber. Lines of credit are the shock absorber. Auto loans and installment loans are starting to show stress. Then if the pressure continues, the mortgage shows it. And the paper gives analysts and policy makers a map of that sequence. But the risk is that everybody like every time I post about mortgage delinquencies and say that they're going to go up, people are like, well, they're so low right now. It's like, well, this just told us that you're thinking about today's number and you should be thinking about two years from now's number. And the risk is that politicians and the media and market participants and real estate professionals keep paying attention to the final symptom and not the buildup that gets us there. And then they're surprised 2 years from now when mortgage delinquencies are up 4x and it's like, oh, how did that happen? Well, here you go. Anyway, the Bank of Canada staff paper gives a very clear clear sequence.

[00:24:10]Roughly 2 years before mortgage delinquency, credit utilization starts rising. one or two years before non-mortgage delinquencies start rising, especially on credit cards. In the final six months, the stress accelerates because people don't have any more debt to pull on to solve the problems. Credit card rears utilization and credit score interactions carry real predictive power and they are trending in a predictively bad direction right now. And so the lesson here is very simple. The mortgage stress leaks out into other credit products before it actually breaks. For homeowners, the early warning sign is rising unsecured debt. For buyers, the warning sign is a purchase that only works in the perfect scenario. And for investors, the signal to watch is consumer credit before mortgage arars hit the headline. For policy makers, the couple of you that watch these videos, the final delinquency number is too late to be the only dashboard or score that you're using and the Bank of Canada staff working papers are telling you to start paying attention to other stuff.

[00:25:04]If you found this useful, hit the subscribe button. Check out realist.ca for Canadian real estate data tools and deal analysis. I'll put a link in the show uh in the description below. And do you think, let me know in the comments, do you think that Canadian mortgage delinquencies are still low because households are genuinely fined or because credit cards and lines of credit are absorbing the stress first? And do you think that mortgage delinquencies are going to go up? I do, but I'm curious to get your take. Thanks a lot for taking time to watch this video and I'll see you again as soon as I