Mortgage arrears double in Canada but remain second lowest in G7

The share of Canadian homeowners seriously behind on their mortgage payments has doubled since 2022, though the country's arrears rate remains the second lowest among G7 nations.

According to the Macdonald-Laurier Institute's Benchmark Canada project, 0.29 per cent of Canadian mortgages were in arrears in September, up from 0.14 per cent in August 2022.

"You find you can't sell it, or if you sell it, it doesn't cover the mortgage," said Ron Butler, a mortgage broker at Butler Mortgage. "You're losing money every month. You're going backwards."

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He said condo investors are among the borrowers in greatest difficulty, facing higher financing costs, lower asking rents and more vacancies.

Benjamin Tal, deputy chief economist at CIBC, said the increase came as borrowers renewed mortgages taken out at exceptionally low rates in 2021.

"What happened is that banks became much more proactive," Tal said, noting that lenders are approaching homeowners facing sharp payment increases and extending repayment terms.

He 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 lender intervention.

Apart from Japan, which has a mortgage arrears rate of 0.20 per cent, the rest of the G7 fared worse. The United States stood at 1.43 per cent, the United Kingdom at 0.89 per cent, and Italy had the highest rate at 2.10 per cent.

Tal thinks the number of borrowers facing steep payment increases when renewing their mortgage has likely already peaked.

"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.

He 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.

Canadian households never went through the drastic reduction in debt that followed the U.S. housing crash in 2008, Tal noted. The Canadian household debt to income ratio kept growing, leaving them more sensitive to interest rate increases.

Ontario leads the country in the number of 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.

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, is working, with lenders incentivized to help stretched borrowers.

"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.

With files from National Post