CMHC reports increase in mortgage risk

Industry News

The Canadian real estate market is stable, but growing concerns within the mortgage sector reveal emerging risks. The last residential mortgage industry report of the Canada Mortgage and Housing Corporation (CMHC) reports an increase in mortgage defaults, an increased use of alternative loans and significant financial impacts for borrowers facing mortgage renewal. These trends, fueled by high interest rates in Canada and household debt, highlight the need for prudent financial planning for Canadian homeowners.

The main points

• Increase in mortgage defaults: up to 0.19% in 2024 as financial pressures increase.
• Risks related to alternative loans: PRI defaults reach 5%, raising concerns.
• Upcoming renewal shock: 1.2 million mortgages will face higher rates in 2025.

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Late payments are on the rise

Mortgage delinquencies, that is, loans more than 90 days past due, reached 0.19% of the market in the second quarter of 2024, compared to 0.14% in 2022. Although this figure remains below current levels pre-pandemic (0.28% in 2019), CMHC highlights the possibility of further increases due to growing financial pressures on households, which could approach pre-2020 rates by the start of the year 2025. The increase in defaults may also reflect overall financial pressure, as high housing and living costs linked to rising interest rates continue to impact Canadian borrowers.

Risks associated with alternative loans

The Canadian alternative lending market has grown significantly, serving higher-risk borrowers who may not qualify for mortgages and loans from traditional lenders or banks. Mortgage investment companies reported a sharp increase in delinquency rates in the single-family home segment, from 1.7% in the fourth quarter of 2022 to 5% in the second quarter of 2024. Alternative lenders are increasingly vulnerable, with higher loan-to-value ratios, as they are sometimes second to first mortgages, indicating a high risk profile for the sector, with a continued increase in defaults.

An imminent renewal crisis

An estimated 1.2 million fixed-rate mortgages, with a total value of more than $300 billion, will need to be renewed in 2025. As more than 85% of them were taken out when the prime rate of the Bank of Canada was at or below 1%, many Canadian homeowners could face a shock come renewal time, which could cause monthly payments to increase by 30% or more. This could significantly weigh on households, particularly those already managing high debt levels, as interest rates are expected to remain well above pre-pandemic lows.

Wider economic implications

The financial strain extends beyond mortgages, as defaults on other credit products – like auto loans and credit cards – continue to climb. Late payments on auto loans, for example, reached 2.42% in the second quarter of 2024, reflecting an increase in consumer debt levels. This increase in late payments could indicate additional risks of mortgage defaults as Canadians face rising costs and interest rate adjustments.

In his Labor force survey October 2024, Statistics Canada indicates that nearly 3 in 10 Canadians (28.8%) aged 15 and over reported living in households that had difficulty meeting essential expenses such as transportation, housing , food, clothing and other necessities over the previous four weeks.

Although this percentage is lower than that recorded in October 2023 (33.1%) and 2022 (35.5%), it remains significantly higher than the 20.4% recorded in October 2020. This continuing trend highlights the financial difficulties faced by many Canadian households, particularly due to rising home prices in Canada and economic uncertainty.

Residents of Quebec are least likely to report financial difficulties, with only 22.3% of households facing difficulties, in contrast to higher rates in Ontario (31.7%) and Alberta (31.3%), which exceed the national average. Renters faced greater difficulties, with 39.2% of them reporting financial difficulties, compared to 24.3% of owners. Immigrants, particularly those who arrived in the last decade, have been among the hardest hit, with more than 4 in 10 (41.2%) new arrivals facing financial hardship in their household. These numbers fell slightly for long-term immigrants, meaning those who have been here for more than 10 years (31.2%) and those who were born in Canada (25.8%).

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Loans for investment properties rise

The Canadian mortgage market has seen a notable shift, with 17% of new mortgages now being issued for investment properties, up from 13% in 2019. This trend highlights an increase in interest in real estate investment, particularly in the rental market, as investors seek to take advantage of the demand for housing.

Future Market Trends and Debt Growth

While the Canadian real estate market shows resilience, total mortgage debt growth remained modest at 3.5% year-over-year, reaching $2.2 trillion in July 2024. Many Canadians are hesitant to purchase a home awaiting a future drop in interest rates. If rates fall, home buying activity could intensify. Measures proposed by the government, such as extending the amortization period to 30 years, could further stimulate real estate activity, providing additional opportunities for potential buyers.

Future outlook

CMHC believes further interest rate reductions by the Bank of Canada could provide some relief to Canadian borrowers, although these potential adjustments may be limited. Stable employment remains crucial, as any slowdown in the labor market could increase default rates. Homeowners renewing their mortgages at high rates should prepare for potential financial adjustments as the changing Canadian economic landscape continues to shape the mortgage market.

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– With the economic landscape shifting and housing ‍prices remaining high, what community‍ resources ⁣or financial counseling‍ services are ⁣available to assist struggling borrowers?

. Interview Questions:

1. As mortgage⁢ delinquencies rise⁣ and more households struggle with their payments,‌ what are some of⁢ the main factors contributing ⁤to‍ this‍ trend?

2. How⁣ does⁤ the rise in ‍popularity of alternative loans affect ‌the⁣ overall ‌health⁤ of​ the mortgage market and what measures can‍ borrowers take to protect themselves from potential default?

3. With high debt levels and ‍interest rate hikes, what can homeowners do to​ prepare for⁣ their mortgage renewal in 2025?

4. What actions can⁢ be taken ⁤by policymakers ‌to⁣ support Canadian borrowers amid ⁤growing ​financial hardship?

5. How does the growth​ of​ investment‌ properties loans ⁣impact the overall housing market and what​ potential risks should investors be​ aware of?

6. What are some long-term trends⁢ shaping the Canadian mortgage market, ⁣and what does the future‍ hold for borrowers?

7. ⁤Can you explain how nesto’s Flexiterm mortgage product can ‍help homeowners manage ⁣their mortgage payments and potentially save money while waiting ⁤for rates to drop?

Section 1: Mortgage Delinquencies and Late ⁢Payments

– Mortgage delinquencies have increased⁤ from 0.14% in 2022 to 0.19% ⁤in 2024, with CMHC predicting further ⁢increases due ​to financial pressures on households. ‍How will this trend affect the overall health of the mortgage market?

– ⁤Alternative‍ lenders have seen a spike in delinquency rates, indicating ⁢a vulnerable sector. What risk factors do these lenders face, and ‌what are some potential solutions for borrowers⁤ considering alternative loans?

Section 2: Mortgage Renewal and⁢ Homeownership Challenges

– With mortgage renewals totaling $300 billion in 2025 and⁢ many homeowners facing higher ‍interest rates, ⁣what advice do you have‍ for homeowners preparing for their renewal?

– ​As housing affordability remains a concern for⁣ many Canadians, ⁤how ⁣can they navigate the‌ challenging market⁤ and secure a mortgage that meets their needs?

Section 3: Economic Impact of Rising Housing Prices‍ and ⁤Financial Difficulties

– ⁣The‍ increasing‍ cost of living has put‌ financial