Residential Mortgage Industry Report
CMHC published their Spring 2024 report, providing highlights of the most recent trends in the Canadian residential mortgage industry alongside findings from their research. Some worrisome facts regarding debt & delinquencies but also hope for lower rates to come.
Highlights
- Under current interest rate conditions, more mortgage holders find themselves in precarious financial situations; the financial buffer they were able to build up during the pandemic has been exhausted.
- Mortgage delinquency rates increased from historically low levels during the last quarter of 2023, as consumers’ financial stress begins to reach the mortgage market.
- Borrowers are continuing to opt for shorter-term, fixed-rate mortgages despite lenders offering large discounts on five- year, fixed-rate mortgages. Both lenders’ and borrowers’ behaviour indicate an
- expectation that interest rates will fall in the coming years.
- Chartered banks mortgage activity is growing, but is being driven by increasing renewals and a rebound in refinances. Despite longer amortizations increasing risk, lower loan-to-value and total debt service ratios suggest risk decreased in 2023 compared to 2022.
Recent Mortgage Market Trends:
- Uncertainty in the mortgage interest rate outlook is driving decision making. With both borrowers and lenders expecting interest rates to fall in the coming years, discounts on fixed-term mortgages are increasing and shorter mortgage terms are becoming more popular.
- As of February 2024, residential mortgage debt stood at 2.16 trillion (+3.4% compared to February 2023), representing the softest growth in nearly twenty-three years. However, as published in the CMHC Housing Market Outlook we are anticipating higher home sales and prices over the coming years, fueled by declining mortgage rates, strong population growth and increases in real disposable incomes. This could lead to mortgage debt growing faster in the coming years.
Risks and Vulnerabilities to the Housing Finance System
- Mortgage delinquency rates have begun to rise as borrowers’ financial vulnerabilities begin to reach the mortgage market. However, this increase is on record lows and delinquency rates remain low.
- For the first time since the beginning of the pandemic, mortgage delinquency rates began to rise at the end of 2023 (up to 0.17% in the fourth quarter of 2023 from a low of 0.14% in the third quarter of 2022).
- Home equity line of credit (HELOC) delinquencies are also increasing (up to 0.16% in January from a low of 0.10% in the third quarter of 2022).
- Despite the increasing economic uncertainty and high interest rate environment, outstanding mortgage debt was 3.4% higher year-over-year in February, meaning it continued to grow faster than inflation and, thus, grow in real terms. Combined with interest rates remaining unchanged, this has increased debt- servicing costs. The combination of higher cost of living and increasing debt- servicing costs has significantly affected households’ budgets over the past year. In this context, the already elevated high household debt poses considerable risks to financial stability.
- Equifax Canada’s Bankruptcy Navigator Index (BNI) further reveals increasing signs of stress among Canadians. Focusing on borrowers with a mortgage and/or a HELOC as a proxy for homeowners, there are two trends in borrower BNI scores over the past year that show increasing vulnerability for both Canadian borrowers and financial institutions: borrowers with higher probability of bankruptcy have increased their debt on average, and there are more borrowers with a high probability of bankruptcy.
Canada Mortgage and Housing Corporation (CMHC) has been helping Canadians meet their housing needs for more than 75 years. I find their insight and reports they provide for Canadians very helpful to better understand the markets, risks, and opportunities.
Source: CMHC Residential Mortgage Industry Report | Spring 2024
Candace Perko, Mortgage Broker
