Canadians quickly falling behind on their mortgages: Benchmark Canada

Countries don’t typically get report cards, but there are hard facts that can be collated, assessed and compared. Enter Benchmark Canada, a new project from the Macdonald-Laurier Institute that brings together more than 40 different metrics that measure this nation’s performance. This fall, the National Post is examining many of those findings.

Canadians have a reputation for paying their mortgages on time, but more homeowners are falling behind, a potential warning sign for the country’s housing market.

Canada has the second-lowest mortgage arrears rate in the G7, but the share of homeowners who fell seriously behind on payments has doubled from its 2022 low, according to Benchmark Canada.

That’s the steepest rise in the G7.

The Macdonald-Laurier Institute project finds that 0.29 per cent of Canadian mortgages were in arrears in September, up from 0.14 per cent in August 2022. Apart from Japan, which enjoys a healthy mortgage arrears rate of 0.20 per cent, the rest of the G7 fared worse — with the United States standing at 1.43 per cent and the United Kingdom at 0.89 per cent. Italy had the highest rate at 2.10 per cent.

Ron Butler, a mortgage broker at Butler Mortgage, says condo investors are among the Canadian borrowers in greatest difficulty, facing higher financing costs, lower asking rents and more vacancies. Some owners find themselves underwater on their investment and unable to sell their units to repay the mortgage, ultimately forced to keep putting money into a losing investment.

“You find you can’t sell it, or if you sell it, it doesn’t cover the mortgage,” he said. “You’re losing money every month. You’re going backwards.”

Benjamin Tal, deputy chief economist at CIBC, said Canada’s increase in arrears came as borrowers renewed mortgages taken out at exceptionally low rates in 2021 when the Bank of Canada made extraordinary moves to shield the economy during the COVID-19 pandemic. Meanwhile, mortgage lenders are managing potential damage by approaching homeowners facing sharp payment increases and extending the time they have to repay their loans.

Tal said housing data show delinquencies of 30 to 60 days had risen while those of 60 to 90 days were flat, which he attributes in part to lenders intervening with borrowers before they fall further behind.

“What happened is that banks became much more proactive,” he said.

Tal thinks the number of borrowers facing steep payment increases when renewing their mortgage has likely already peaked. While arrears will continue to rise, lenders have so far managed the renewal pressure better than feared, he said.

“The fact that we are still standing is actually very reassuring,” Tal said.

Butler said red flags would be raised if national delinquencies climbed beyond the 0.40 to 0.50 per cent mark. However, he cautions against treating a low arrears rate as evidence that homeowners are financially comfortable.

“People will go into their personal lines of credit and use their credit cards to pay for everyday stuff just to make sure their mortgages are paid,” Butler said.

Butler said some borrowers who cannot meet stringent bank requirements have turned to more expensive alternative financing, although the Benchmark Canada data exclude private lenders and credit unions.

“The eternal belief is that if I just keep this house, eventually it’ll go back up in value and life will be great,” he said. “The fear of never being able to get a mortgage again is very, very big.”

Tal said Canada’s smaller market for high-risk mortgages also helps explain the low arrears datapoint. He regards the country’s mortgage borrowers as a better credit risk than those in many other markets, including those in the G7.

Canadian households never went through the drastic reduction in debt that followed the U.S. housing crash in 2008, Tal noted. Canadian household debt-to-income ratio kept growing – now roughly $1.76 in debt for every dollar of household disposable income – leaving them more sensitive than Americans to interest-rate increases if inflation forces borrowing costs to rise higher again.

Ontario, by virtue of being the most populous province, also leads the country in mortgage delinquencies, data from the Canadian Bankers Association show. In July, Ontario’s arrears rate was at 0.34 per cent, or 7,268 mortgages, just over half the Canadian total, according to the CBA. Saskatchewan leads the country in arrears with 0.46 per cent, followed by Manitoba and Ontario at 0.34 per cent.

Tal said the downturn in condos bought by investors could take at least another two years to clear.

“If it’s just an investment and nobody’s touching your primary house, then it’s not such a disaster. It’s equivalent to people losing in the stock market,” he noted.

The job market remains the biggest threat to Canada’s housing market, with Statistics Canada reporting a drop of 68,000 jobs in September, the second straight month of job losses. Butler said job losses outweigh the other causes of default, while Tal warns that a worsening trade war could drive unemployment and push Canada into recession.

But Tal believes that Canada’s banking system – firmed up during the 2008-9 recession to ensure borrowers can afford their mortgage payments – is working, with lenders incentivized to help stretched borrowers through any shocks.

“It doesn’t mean that there will not be casualties, and the number of casualties will be rising, but it will be manageable,” Tal said.

Canada’s arrears rate remains below the long-term average of roughly 0.40 per cent cited by Benchmark Canada.

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