The mortgage market isn’t buckling amid higher rates at renewal time, but plenty of borrowers are feeling the strain
Canada’s mortgage market is holding up better than many feared amid the renewal wave and economic volatility in the trade war era – but a growing divide between financially resilient borrowers and those under mounting pressure is continuing to emerge.
The good news first: plenty of homeowners have adjusted to the reality of renewals at higher interest rates, with 99.7% of all mortgage holders continuing to make payments on time, according to new data from TransUnion Canada.
That signals a mortgage market that’s still in decent health and is still falling well short of the crisis some economists and lenders feared when interest rates began to soar around 2022.
“When the interest rates went way up, we thought we were going to see a huge spike [in arrears],” Matt Fabian (pictured top), TransUnion Canada’s senior director of financial services research and consulting, told Canadian Mortgage Professional.
“It was much less than we were bracing for, and certainly than a lot of the big banks and mortgage lenders were bracing for.”
But Canada’s housing market is a picture of different regions, and that’s equally the case when it comes to the mortgage stress outlook. Serious delinquency has risen by approximately 10 basis points year over year in Ontario, TransUnion Canada said, with BC seeing an increase of more than seven basis points.
Other provinces are faring better or have even improved, a difference that Fabian said reflected the much more prominent affordability pressures in Canada’s two most expensive housing markets.
“Home prices were higher in those markets historically,” he said. “So as mortgages come up for renewal, that payment shock becomes a lot more severe when you think about the size of the mortgage and the fact that a lot of people in those markets may have been renewing coming off a five-year term.
“Back when they had booked that original mortgage, interest rates were 1% or 2%. Now they’re 5% or 6%.”
Stress tests ‘have proven to be helpful’ in navigating payment shock
That’s not to say Ontario and BC are facing a mortgage meltdown. Ontario’s serious delinquency rate may have risen, but it stands at just 0.41% – meaning an overwhelming percentage of mortgage holders in the province are still making their payments on time.
“It’s something we’ll continue to monitor, and I don’t want to dismiss it. It’s something worth noting that delinquency rates are up [but] I think it’s still important to consider overall that delinquency rates in mortgages are really low, even when we compare them to the US or other markets,” Fabian said.
One reason for that strength remains the quality of the borrower pool, thanks in large part to stress test rules introduced by the Office of the Superintendent of Financial Institutions (OSFI) under Guideline B-20 in 2018.
That requires borrowers to prove that they can handle a mortgage rate of 5.25% or two percentage points above their actual rate – whichever is higher – and Fabian said it’s been an important way of safeguarding the market in a bumpy spell. “The stress testing and the additional qualifying rules have proven to be helpful from a delinquency perspective,” he said.
Trade war remains a curveball for arrears outlook
There are possible further hurdles still ahead, not least the trade uncertainty and its potential impact on Canadian jobs as well as fears that inflation could be set to rise again.
The US-Iran war has sent oil prices soaring and put upward pressure on the overall inflation number, while retaliatory counter-tariffs in the ongoing trade war could also raise the threat of a further inflation uptick.
The last thing needed by Canadians struggling with the cost of living, Fabian said, is another shock and higher prices at the pump and checkout counter.
“We’ve seen a lot of resilience through COVID, through high interest rates, through a bunch of different economic cycles,” he said. “But it really depends – will inflation spike up again? That creates a strain on the consumer wallet, which again forces people to make trade-offs.”
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