Canadian mortgage arrears double from 2022 low but remain among G7's lowest

Canada's mortgage arrears rate has doubled from its low in 2022, a new report finds, though the country still maintains one of the lowest rates of serious delinquency among major economies. The share of Canadian mortgages in arrears reached 0.29 per cent in September, up from 0.14 per cent in August 2022, according to data from the Macdonald-Laurier Institute's Benchmark Canada project. Among G7 nations, only Japan has a lower arrears rate, at 0.20 per cent. The United States stands at 1.43 per cent, the United Kingdom at 0.89 per cent, and Italy has the highest rate at 2.10 per cent.

Ron Butler, a mortgage broker at Butler Mortgage, says condo investors are among the borrowers facing the greatest difficulty. They are contending with higher financing costs, lower asking rents and more vacancies. Some owners find themselves underwater on their investment, unable to sell their units for enough to repay the mortgage and forced to keep funding a losing proposition. "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 the increase in arrears came as borrowers renewed mortgages originally taken out at exceptionally low rates in 2021. He said mortgage lenders have managed potential damage by approaching homeowners facing sharp payment increases and extending their repayment timelines. Tal noted that 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.

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Tal believes the number of borrowers facing steep payment increases upon renewal 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. He regards Canada's mortgage borrowers as a better credit risk than those in many other markets, partly because the country has a smaller market for high-risk mortgages.

Butler cautions that a low arrears rate does not mean homeowners are financially comfortable. He said some people dip into personal lines of credit or use credit cards to cover everyday expenses just to keep their mortgage payments current. "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. He added that some borrowers who cannot meet bank requirements have turned to more expensive alternative financing, though the Benchmark Canada data exclude private lenders and credit unions.

Butler said national red flags would be raised if delinquencies climbed beyond the 0.40 to 0.50 per cent mark. Canada's current arrears rate remains below the long-term average of roughly 0.40 per cent cited by Benchmark Canada. According to data from the Canadian Bankers Association, Ontario leads the country in the number of delinquent mortgages due to its population size, with an arrears rate of 0.34 per cent in July, representing 7,268 mortgages. Saskatchewan has the highest provincial rate at 0.46 per cent, followed by Manitoba and Ontario at 0.34 per cent.

Tal noted that Canadian households never underwent the drastic debt reduction that followed the U.S. housing crash in 2008. The Canadian household debt-to-income ratio kept growing, leaving households more sensitive to interest-rate increases. The ratio now stands at roughly $1.76 in debt for every dollar of household disposable income. 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, Tal and Butler said. Statistics Canada reported a drop of 68,000 jobs in September, the second straight month of job losses. Butler said job losses outweigh other causes of default, while Tal warned that a worsening trade war could drive unemployment and push Canada into recession. Tal believes Canada's banking system, fortified after the 2008-2009 recession, is working, with lenders incentivized to help stretched borrowers through economic 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.

With files from National Post