In recent years, it has become a common concern that real estate in Canada has become increasingly unaffordable. Despite Canadian mortgage delinquency being at an all-time low, home prices continue to hit new records. What exactly does that mean for Canadians, the housing market, and our future?
What is a mortgage default?
A mortgage default is the result of a mortgage borrower failing to honour the terms of the mortgage agreement, usually as a result of failure to make payments. Failure to make mortgage payments is also known as mortgage delinquency or arrears.
What are the current mortgage delinquency rates in the Canadian housing market?
According to data obtained from the Canada Mortgage and Housing Corporation (CMHC), the mortgage delinquency rate in the third quarter of 2021 was only 0.2%. This is down from 0.29% a year ago, and down from 0.38% in 2012. For reference, there are almost 5,000,000 active mortgages in Canada. Current statistics would indicate that less than 10,000 of those home loans are currently delinquent. Of these delinquent mortgages, CMHC indicates that those valued at $200,000 or less were the most likely to be in default at 0.27%, as well as mortgages held by people aged 65 and above.
On the provincial level, Saskatchewan has the highest delinquency rates at 0.53%, while the lowest are in British Columbia and Ontario, reporting 0.13% and 0.09% respectively.
Why do mortgages default?
Obviously, no one wants to purposely default on their home loan. Not only is it very stressful and potentially damaging to your financial health, but in a worst-case scenario, it can lead to the loss of your home. Unfortunately, due to matters out of their control, Canadian homeowners will occasionally find themselves in arrears of their payments. This can be as a result of personal issues, or part of a larger economic trend like a recession.
What happens when mortgages default?
Mortgage delinquency does not immediately mean you will lose your home. Most lenders will offer repayment plans to make up for missed payments. If you had difficulty making one payment on time, were upfront with your lender, and took steps to correct the issues, a missed payment will not be the end of the world. It can, however, affect your credit score, and thus, your future lending ability. Subsequent missed payments can be much more severe.
However, if your lender chooses, they may take legal action after a missed payment, especially after multiple missed payments. Lenders may go so far as to exercise power-of-sale or foreclosure and sell your home, forcing you to move. You will also be on the hook for paying legal fees and any fees as a result of defaulting on your lease agreement.
Why should we pay attention to mortgage default rates and mortgage debt?
For individuals, mortgage defaults are an unfortunate situation. On a larger scale, economists can look at mortgage defaults as an indicator of economic issues. If Canadians were to begin defaulting on a mass scale, it would present a large issue for the Canadian economy as citizens would be plunged into financial distress and potentially be losing their homes.
Instability with mortgages can indicate or even cause serious issues in the economy, as was witnessed in the 2008 financial crisis. But, Canada did not see the same impacts then as our mortgage lending practices now tend to be more conservative.
It’s especially important to pay attention to this figure as Canadian mortgages get more expensive amid low mortgage rates and as mortgage debt comes to represent an increasingly large percentage of our national consumer debt. The more Canadians owe in mortgage debt, the more at risk they are when the economy shifts.
However, it seems that most Canadians are currently successfully handling their mortgages. Even with the unprecedented conditions of the last year, mortgage delinquencies actually saw a decrease. Even as our economy recovers and mortgage rates increase, a serious spike in mortgage delinquency seems unlikely.
What can we do?
There is a lot that can be done for mortgage defaults and a lot has already been done.
From a personal perspective, lenders may enter repayment plans or deferrals ideally before any payments are missed. This can significantly lessen the impact of mortgage defaults. In fact, mass deferrals were used at the start of the pandemic as a way to weather some of the potential impacts of job losses and economic recession. These measures, among others, seemed to have worked as Canadians did not witness any major mortgage default catastrophe as a result of the pandemic.
There have also been efforts made to simply ensure that mortgages are secure before they are even offered. Firstly, this is why mortgage lenders will always consider your debt ratios and credit history before issuing a mortgage.
Beyond that, the government has instituted a mortgage stress test that ensures Canadians will be able to continue funding their mortgages even in the event of a significant increase in interest rates (which the Bank of Canada and other central banks have indicated are coming in 2022).
There also exists mortgage default insurance for these exact scenarios. For any mortgage putting less than 20% down, mortgage default insurance is required by law to be purchased. This insurance does not protect the borrower, but rather protects the lender in the event of a default.
Unfortunately, while these efforts have kept mortgages safe from default, many people are now excluded from being able to get a mortgage at all. So while mortgage default rates may be low, we must ask to what extent this is a result of selection bias, and how this serves to push the dream of homeownership further away from Canadians.