Mortgage payment defaults are on the rise

Memo 1: Mortgage payment defaults are increasing

Despite steadily rising borrowing costs over the last two years, Canadian mortgage holders have been lauded for their ability to keep up with their payments – but new data shows cracks may be forming.

Fourth-quarter 2023 numbers from Equifax Canada shows borrowers are increasingly missing their mortgage payments, especially as they come up to renew their terms at today’s higher rates. The issue is particularly prominent in Ontario, where the mortgage delinquency rate has surged by 135.2%, and in British Columbia, where it has increased by 62.2%. That has even outpaced the payment defaults that occurred during the pandemic, Equifax Canada points out. 

The report says that once borrowers have renewed their mortgages, their payments increased by an average of $457 across Canada. However, in BC and Ontario, payments grew by more than $680.

“As we assess the unfolding dynamics in the housing market, it's evident that upcoming mortgage renewals will be pivotal for many homeowners,” stated Rebecca Oakes, Vice President of Advanced Analytics at Equifax Canada, in a release. “With the prospect of renewing mortgages at substantially higher rates than current ones, consumers who locked in historically low interest rates in 2020 — particularly those with substantial loan amounts — may face challenges in sustaining their payments.”

Also read: Renewing your mortgage in 2024? Here's what to expect

A poll conducted in December by Ratehub.ca found a total of 68.5% of respondents said it had become more challenging to pay their mortgage since March 2022, when the BoC kicked off its rate hiking cycle. Of this group, an additional 66.9% expressed worry about being able to make their mortgage payments once their renewal comes up.

According to Ratehub.ca’s historical mortgage rates chart, both fixed and variable mortgage rates have surged since 2020. Today’s best five-year insured fixed rate is now 4.84%, a whopping 345 basis points higher than the 1.39% available in December of that year. Five-year discounted variable rates now sit 496 bps higher, at 5.95%.

While the new default figures appear alarming and could suggest a troubling trend, James Laird, co-CEO of Ratehub.ca and President of CanWise mortgage lender, points out that, from a big-picture perspective, Canadian mortgage borrowers consistently make their mortgage payments. “The actual amount of delinquency in Canada remains low,” he says, “just 0.14% for mortgages at the end of 2023 (up from 0.09% in ’22) and 1.3% for non-mortgage loans (up from 1.0% a year earlier).

Overall, Equifax also reports that in Q4 2023, total consumer debt hit $2.45 trillion, up 3.2% from the previous year. Non-mortgage debt rose by 4.1%, largely due to a $15.9-billion rise in credit card debt during 2023 to $116.2 billion.

Memo 2: US CPI bolsters “higher for longer” fears

As central banks gear up to start lowering interest rates, analysts are peeling their eyes for any hint as to when those cuts may occur. The latest crop is the inflation report out Wednesday from south of the border – and markets don’t like what they’re seeing. 

The US Consumer Price Index (CPI) rose by 0.4% in February to 3.2%, higher than the expected consensus, and above 3.1% recorded in January. The Core measures – which are a key consideration in the US Fed’s rate decisions – came in at 3.8%, barely a budge from the previous 3.9%. The growth was mainly due to a 2.3% increase in energy prices, their largest since August 2023.

While the stronger-than-expected inflation reading won’t sway the Fed from its highly-anticipated rate hold on March 20, it does bolster the argument for keeping rates higher for longer. This is notable in Canada, as the Bank of Canada is fighting a similar inflation fight, and historically increases or cuts rates in tandem with the Fed. Government of Canada five-year bond yields ticked up slightly on the news to the 3.5% range.

“This initial inflation report for February is an ugly read that will do nothing to sooth nerves on the FOMC,” writes Scott Anderson, Ph.D and Chief US Economist and Managing Director of Economics at BMO. “Inflation remains the number one problem they still have yet to solve. Clearly, restrictive monetary policy has not yet fully done its work and a patient and slightly hawkish Fed must remain in place for the monetary medicine to fully take effect.”

Memo 3: Canadian household debt improves – but it’s due to rising rates

Statistics Canada released their latest edition of wealth and income data this week, revealing that household debt has increased by 3.4% over the course of 2023. While that’s actually the slowest pace of growth recorded since the 90s, the agency notes it’s due to the heavy weight higher interest rates have placed on housing activity, ultimately shrinking mortgage growth as today’s borrowers qualify for smaller loans due to a steeper mortgage stress test. As a result, the debt-to-income ratio has dipped 0.5% to 178.7%, its lowest level since Q2 2021.

StatCan also reports the household debt service ratio – which measures the total payments of principal and interest Canadians pay as a ratio of their disposable income – was 15% in Q4, the highest level in the data’s history.

The largest contributor to wealth, meanwhile, was performance in the bond and equity markets, which helped push household net worth up by 1.8% in Q4 to $16.42 trillion.

In a commentary note, BMO Economist Shelly Kaushik wrote slower mortgage growth will continue to be a lag on the measure until anticipated rate cuts come to fruition later this year.

“Household debt ratios improved in the fourth quarter as elevated rates kept a damper on demand for mortgage loans,” she writes. 

“However, the latter is expected to rebound when rates begin to fall in the middle of 2024. In the meantime, elevated debt service ratios continue to be a key headwind for household spending and broader economic activity. Keep an eye on government debt levels in the coming quarters, which look to rise further as larger borrowing plans are unveiled across the country this budget season.”

Also read:

• Bank of Canada holds target interest rate at 5% in March 2024 announcement
• Toronto home sales surge in February as buyers expect rate cuts
• Inflation falls to 2.9% in January
• 67% of mortgage borrowers are worried about making their renewal payments