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Underlying risks in Canada’s mortgage market are becoming more evident as borrowers face the sharpest spike in interest rates for over four decades, the national housing agency has said.

Tania Bourassa-Ochoa, senior specialist of housing research at Canada Mortgage and Housing Corporation (CMHC), told Canadian Mortgage Professional that the agency’s just-released residential mortgage industry report highlighted the impact that rate hikes to date have had on homeowners’ ability to repay their mortgage.

One out of three borrowers have seen their monthly mortgage payment jump since the Bank of Canada began increasing interest rates in March of last year, Bourassa-Ochoa said, with over 290,000 mortgages renewed with chartered banks at higher interest rates in the first half of 2023.

“We have more signs that Canadian mortgage holders are struggling in terms of their debt payments, and so a lot of these indicators are really highlighting the vulnerability of homeowners in Canada,” she said.

An even greater shock appears to be coming down the line. About 45% of all outstanding mortgages across the country – 2.2 million in total – are expected to face higher interest rates upon renewal in 2024 and 2025, with monthly payments potentially rocketing by up to 40% of their current levels.

That’s a reality Bourassa-Ochoa said homeowners need to prepare for now. “There are already signs that are showing us that Canadians are having a harder time to make ends meet, and… one of the things that we really want to highlight with this piece is that homeowners need to be thinking about what that’s going to be looking like for them, and just start thinking about the different options that are potentially available,” she said.

“Consumers are already doing that in some ways with [longer] amortization, with their choices around interest rate terms. And then they’re delaying big purchases, reducing consumption services of non-essential goods and services. There are a lot of things that need to be taken into consideration because yes, it’s going to be a significantly higher cost.”

Delinquencies, arrears on the rise in 2023
Meeting mortgage payments traditionally ranks as a top priority for Canadian homeowners above most other debt obligations – but a growing number of Canadians are facing challenges making those other debt payments, CMHC said.

Delinquency rates of 90 days or more have jumped for credit cards, auto loans, home equity lines of credit (HELOCs), and lines of credit, according to the agency, with fully half of mortgage holders currently struggling to maintain certain payments including their mortgages.

What’s more, first-stage delinquencies and second-stage mortgage delinquencies – from the 30-to-60-day and 60-to-90-day marks – are also increasing, Bourassa-Ochoa said, while CMHC has also noted a “slight uptick” in delinquencies for larger mortgage values.

The percentage of mortgages in arrear among those with the largest value, $850,000 and above, ticked slightly upwards by three basis points, the agency said, with arrears having steadily increased since 2022’s third quarter in the cohort of mortgages above $400,000.

What’s the risk of higher interest rates lasting for a prolonged period?
The Bank of Canada has kept interest rates steady in its last two decisions, with speculation beginning to intensify that rate cuts could be on the horizon at some point in 2024 – potentially in the second half of the year.

Still, the central bank’s senior deputy governor Carolyn Rogers warned last week in Vancouver that rates could well remain “persistently higher” than what Canadians may be used to in the long run.

That prospect of a higher-for-longer rate environment raises questions about what lies in store for mortgage holders who already face growing financial pressure, Bourassa-Ochoa said, as well as the implications for the wider economy.

Prolonged high rates would be unlikely to help ease the affordability crisis that’s long gripped the national housing market – and the possibility of continuing high mortgage payments for scores of borrowers could increase the Canadian economy’s overall risk levels, Bourassa-Ochoa suggested.

“Everything costs so much more right now, and these additional higher monthly payments that are coming up in the next two years – that’s definitely going to be weighing much more on Canadians so it’s putting us in a little bit more of a vulnerable situation,” she said.

“And when borrowers are overstretched, that puts them at greater risk of default. So it’s definitely an important risk to take note of.”

Source: Canadian Mortgage Professional