The Canadian Mortgage and Housing Corporation (CMHC) released its Residential Mortgage Industry Report at the end of May.
According to the report, during the pandemic, many mortgage holders were able to build a financial buffer, but those reserves have been depleted. The economic stresses of the past few years are starting to impact the mortgage market, as reflected in the increase in mortgage delinquency rates from historically low levels during the last quarter of 2023, signalling rising financial strain.
Delinquency and Foreclosure Rate Trends
For the first time since the beginning of the pandemic, mortgage delinquency rates began to rise at the end of 2023, increasing to 0.17% in the fourth quarter from a low of 0.14% in the third quarter of 2022. Home equity line of credit (HELOC) delinquencies also increased to 0.16% in January from a low of 0.10% in the third quarter of 2022. These increases are partly attributed to a rise in the unemployment rate, which jumped from 4.6% at the end of 2022 to 5.3% at the end of 2023. High household debt remains a concern, as higher costs of living and increasing debt-servicing costs are affecting household budgets.
Lender Activity
Chartered banks’ mortgage activity is growing, driven by increasing renewals and a rebound in refinances. The Big 6 banks saw the largest increase in market share for extended mortgages (+11.8 percentage points) in the fourth quarter of 2023, primarily due to these factors. Meanwhile, other chartered banks and credit unions recorded decreases in their market shares for extended mortgages.
Alternative lenders are facing a higher risk profile, with rising delinquency and foreclosure rates and a decreasing share of lower-risk, first-lien mortgages. The delinquency rate for insured mortgages among credit unions, mortgage finance companies, insurance companies, and trusts has decreased more since 2020 compared to uninsured mortgages. In 2021, the delinquency rate for insured mortgages was nearly double that of uninsured loans, but this gap narrowed significantly by 2023.
Interest Rates and Discounts and Borrower Preferences
Uncertainty in the mortgage interest rate outlook is driving decision-making for both borrowers and lenders. Discounts on fixed-term mortgages increased notably in the first two months of 2024, reversing the trend from the last half of 2023. This increase in discounts suggests that lenders are expecting potential rate cuts by the Bank of Canada (BoC) sooner than previously anticipated.
Despite these increasing discounts, most borrowers remain hesitant to lock in for the traditional five-year mortgage term due to uncertainty about mortgage rate outlooks. Instead, borrowers are opting for shorter-term, fixed-rate mortgages, anticipating that interest rates will fall in the coming years. Terms ranging from three to less than five years accounted for nearly 40% of all lending for newly extended mortgages by federally regulated financial institutions in February 2024. Additionally, variable-rate mortgages have increased in popularity, accounting for 15% of newly extended mortgages by these institutions.
Residential Mortgage Debt Growth
As of February 2024, residential mortgage debt stood at $2.16 trillion, a 3.4% increase compared to February 2023. This represents the softest growth in nearly twenty-three years. However, higher home sales and prices are anticipated over the coming years, driven by declining mortgage rates, strong population growth, and increases in real disposable incomes, which could lead to faster growth in mortgage debt in the future.
Financial Stability and Risks: High Household Debt
High household debt continues to be concerning. The increase in debt-servicing costs, combined with a higher cost of living, has put considerable pressure on household budgets. Household debt levels are already elevated, so added financial stresses are significant.
Overall, the mortgage market is experiencing increased financial stress among borrowers, shifts in borrower preferences towards shorter-term and variable-rate mortgages as borrowers wait for lower interest rates, and growing risks among alternative lenders. Residential mortgage debt continues to grow. Lenders are preparing for potential interest rate cuts in the near future.