Debt‐relief programs and money left on the table: Evidence from Canada's response to COVID‐19

Abstract

This paper analyzes the effectiveness of debt-relief programs targeting shortrun household liquidity constraints implemented in Canada in response to the COVID-19 pandemic. These programs allowed individuals to push off mortgage and credit card payments and cut in half interest rates on credit card debt. Using credit bureau data, we document that, despite potential savings above $4 billion, enrolment was limited: 24% for mortgages and 7% for credit cards. By exploiting the richness of our data set, we provide evidence that close to 80% of individuals were unaware of the credit card relief program while others faced important fixed non-monetary costs preventing uptake.Résumé. Nous analysons l'efficacité de mesures d'allégement financier aux emprunteurs mises en place par les institutions financières canadiennes durant la pandémie de COVID-19. Ces mesures offraient aux ménages l'occasion de repousser leurs paiements hypothècaires ou de cartes de crédit. À l'aide de données sur les comptes de crédit individuels, nous documentons que malgré le fait que ces programmes offraient des économies potentielles de plus de 4 milliards de dollars, les taux de recours ont été

The heterogeneous effects of COVID‐19 on Canadian household consumption, debt and savings

“…We calibrate a rule on the basis of liquid assets and loan‐to‐value ratio (LTV) required for a mortgagor to qualify for a deferral such that 15% of mortgagors defer, and 20% of those who defer have an LTV of less than 50%, consistent with Allen et al. ( 2021 ).…”

“…19 Deferred interest payments increase the outstanding balance and imply that mortgagors who defer face higher payments post-deferral. We calibrate a rule on the basis of liquid assets and loan-to-value ratio (LTV) required for a mortgagor to qualify for a deferral such that 15% of mortgagors defer, and 20% of those who defer have an LTV of less than 50%, consistent with Allen et al (2021).…”

“…Our calibration implies that mortgage deferrers have low liquid wealth, high DSR and high LTV. SeeAllen et al (2021) for an examination of which households selected deferrals.…”

Consumer credit usage in Canada during the coronavirus pandemic

“…The Financial Consumer Agency of Canada ( 2020 ) shows that the vast majority of the deferral requests were approved and that this accounted for a significant fraction of the outstanding loans; see Vallée ( 2020 ) and Allen et al. ( 2022 ).…”

“…6 Since April 2020, financial institutions, at their discretion, have also provided loan payment deferrals to clients who self-declared to have been negatively impacted by the pandemic. The Financial Consumer Agency of Canada (2020) shows that the vast majority of the deferral requests were approved and that this accounted for a significant fraction of the outstanding loans; see Vallée (2020) and Allen et al (2022).…”