Canadian homeowners continue to face risks from a looming shock in mortgage renewals, even as the Bank of Canada lowers its benchmark interest rate, a report released Monday warns.
The Canada Mortgage and Housing Corp. (CMHC) said Monday that the mortgage delinquency rate — the proportion of Canadians who have missed payments on their mortgage for more than 90 days — continued to rise in the second quarter of 2024.
Compared to the previous quarter, the delinquency rate rose just a few thousandths of a percentage point to around 0.192 per cent by the end of June. That’s up from the all-time low of 0.14 per cent recorded in 2022, and from 0.17 per cent seen at the end of 2023.
The CMHC noted the delinquency rate on mortgages is still “well below” the 0.28 per cent seen in 2019.
But Tania Bourassa-Ochoa, the Crown corp.’s deputy chief economist, says the CMHC expects the “sticky upwards trend” in mortgage delinquencies will mean a return to those pre-pandemic levels by the end of this year or early 2025.
“We have already been seeing this financial pressure mount up, generally speaking, amongst homeowners,” she tells Global News.
Signs of financial stress outside mortgages
While Canadians continue to make payments on their mortgages, there are signs of stress bubbling up on other credit products, which CMHC warns could continue to spread to home loans.
Auto loans saw a “significant increase” in delinquency rates in the second quarter of the year, rising to 2.42 per cent from 2.11 per cent in the previous quarter. Credit cards and lines of credit also saw their delinquency rates rise over the first six months of 2024, CMHC said.
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“Credit card and auto delinquencies can be leading indicators of mortgage delinquency rates, so these patterns suggest that mortgage delinquency will continue to increase into 2025,” the report read.
Bourassa-Ochoa explains that Canadian households will generally prioritize their mortgage before any other payments, meaning it can be the last domino to fall when the budget gets tighter. But she says the higher cost of living, elevated interest rates and generally large mortgages are continuing to mount on Canadians facing mortgage renewals in the year ahead.
Some 1.2 million Canadians have fixed-rate mortgages due for renewal in 2025, CMHC says. The vast majority of these households initiated or renewed their mortgages when the central bank policy rate was at or below one per cent, the report notes.
The Bank of Canada has begun an interest rate easing cycle, so far lowering its policy rate by 1.25 percentage points since June.
But even with the central bank’s policy rate now at 3.75 per cent, at least 1.05 million mortgage consumers will be renewing their loans “at significantly higher interest rates” next year, CMHC said.
Bourassa-Ochoa says the CMHC calculates the average homeowner renewing next year will see their monthly payments balloon by 30 per cent.
Bank of Canada rate cuts could provide lift
Many economists expect the Bank of Canada will continue to cut its key rate through 2025.
But those projected future cuts are already priced into the market, Bourassa-Ochoa explains, meaning the Canadian mortgage space might already be seeing the lowest rates on offer for the current cycle.
CMHC projects housing activity will pick up in 2025, buoyed by the Bank of Canada’s interest rate cuts and Ottawa’s proposed changes to expand the availability of insured mortgage and 30-year amortizations.
A tighter Canadian housing market can also act as a cushion to distressed homeowners. Even in a slower 2024 market, Bourassa-Ochoa says that most owners are still able to sell their home in a timely fashion, limiting the potential for households to default on their mortgage if they’re unable to make payments.
Bourassa-Ochoa says further interest rate cuts will also stimulate other parts of the economy, including a possible tightening in the labour market. The better Canadians’ employment prospects look, the more likely they’ll be able to handle higher mortgage payments, she notes.
Conversely, if Canada faces a sudden economic shock that leads to more weakening on the jobs front, mortgage delinquencies and defaults could rise higher than the CMHC currently projects.
Higher home prices over the past few years have increased the size of Canadian mortgages, which Bourassa-Ochoa says puts households “in a more fragile financial state.”
“We’re definitely expecting the policy rate cuts to put a little bit of momentum into the economy. And that should definitely be limiting that increase in mortgage arrears,” she says. “But it’s important to note that households are in a more vulnerable financial position than they were before.”
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