Mortgage arrears double in Canada but remain among lowest in G7

The share of Canadian mortgages in arrears doubled from its low in 2022, reaching 0.29 per cent in September according to the Macdonald-Laurier Institute's Benchmark Canada project. This rate is the second-lowest in the G7, behind only Japan's 0.20 per cent. The United States recorded a rate of 1.43 per cent, the United Kingdom 0.89 per cent and Italy 2.10 per cent. The increase comes as homeowners renew mortgages originally taken at the exceptionally low rates available during the COVID-19 pandemic.

Benjamin Tal, deputy chief economist at CIBC, said the rise was expected as those low-rate loans matured. He said lenders have managed the situation by proactively contacting borrowers facing sharp payment increases and offering extended repayment terms. Tal noted that delinquencies of 30 to 60 days had risen while those of 60 to 90 days remained flat, a pattern he attributes to this early intervention. "What happened is that banks became much more proactive," he said.

Ron Butler, a mortgage broker at Butler Mortgage, said condo investors are among those struggling the most. He said they face higher financing costs, lower rental income and increased vacancies. Some are in a position where selling the property would not cover the outstanding mortgage debt. "You find you can’t sell it, or if you sell it, it doesn’t cover the mortgage," Butler said. "You’re losing money every month. You’re going backwards."

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Tal believes the peak number of borrowers facing steep payment increases upon renewal has likely passed. He said while arrears will continue to climb, the financial system has handled the pressure better than some forecasts predicted. "The fact that we are still standing is actually very reassuring," Tal said. He added that Canada's smaller market for high-risk mortgages and the generally stronger credit profile of its borrowers also contribute to the relatively low arrears rate.

Butler warned that the low arrears rate does not necessarily indicate financial comfort among homeowners. He said some are using other forms of credit to cover daily expenses in order 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 considers a national delinquency rate climbing beyond 0.40 to 0.50 per cent a significant red flag.

Butler noted some borrowers unable to meet traditional bank requirements have sought more expensive financing from alternative lenders, whose data is not included in the Benchmark Canada figures. "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 the correction in the investor condo market could take at least two more years to fully play out.

Data from the Canadian Bankers Association shows Ontario, due to its size, has the highest number of delinquent mortgages. In July, its arrears rate was 0.34 per cent, representing 7,268 mortgages, more than half the national total. Saskatchewan had the highest provincial rate at 0.46 per cent, followed by Manitoba and Ontario at 0.34 per cent. Tal pointed out that Canadian households did not undergo a major debt reduction like the U.S. after 2008, leaving the debt-to-income ratio high at about $1.76 owed for every dollar of disposable income. This makes them particularly sensitive to further interest rate increases. Butler said job losses are the primary driver of mortgage defaults, while Tal warned a worsening trade war could raise unemployment and trigger a recession.

Tal expressed confidence in Canada's banking system, which was strengthened after the 2008-09 recession with rules ensuring borrowers can afford their payments. He said lenders have a strong incentive to help borrowers handle financial 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. The current arrears rate remains below the long-term average of roughly 0.40 per cent.

With files from National Post