As the Canadian housing market contends with higher interest rates, increasing delinquency rates, and a growing alternative lending sector, the Canada Mortgage and Housing Corporation (CMHC) has issued a detailed report outlining the risks facing the residential mortgage market. This analysis reveals emerging stress factors, especially in the alternative lending sector, as well as potential challenges in the years ahead.
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Key Findings from CMHC’s Mortgage Market Report
CMHC’s latest report on the residential mortgage market highlights various trends, risks, and future concerns, particularly as a significant wave of mortgage renewals looms on the horizon.
- Delinquency Rates on the Rise: The report reveals that while mortgage delinquencies remain low by historical standards, they are rising steadily. Mortgages that are more than 90 days past due reached 0.19% in the second quarter of 2024, a noticeable increase from the record low of 0.14% in 2022. Although these numbers are below pre-pandemic levels, the trend indicates growing financial strain among homeowners.
- Strain in Alternative Lending Sector: CMHC points to increasing delinquencies within the alternative lending sector, where many borrowers may struggle to meet traditional bank qualifications due to lower credit scores or inconsistent income. This segment has seen delinquency rates exceeding pre-pandemic levels, with mortgage investment corporations (MICs) reaching a 90-day delinquency rate of 1.15% in the first quarter of 2024.
- Single-Family Home Mortgages in Alternative Lending: In the single-family home segment, delinquency rates are more concerning, with rates for top mortgage investment corporations on mortgages more than 60 days past due spiking to 5% in the second quarter, up from 1.7% at the end of 2022.
The Rise of Alternative Lenders and Their Risks
Alternative lenders, which have expanded significantly over recent years, are increasingly shouldering the risk of Canadian mortgage debt. These lenders cater to clients who might not qualify at major banks and generally offer higher interest rates to offset the risk. However, the CMHC report shows that:
- Growth in Assets Under Management: The assets managed by the top 25 mortgage investment corporations grew by 4.9% year-over-year in the second quarter of 2024, outpacing the 3.5% growth in the overall residential mortgage market. This increase suggests that more Canadians are turning to alternative lenders to secure mortgages.
- Higher Loan-to-Value Ratios: CMHC cautioned that these lenders have increased loan-to-value (LTV) ratios, meaning they are lending a higher percentage of the home’s value. Higher LTV ratios imply more risk for both lenders and borrowers, especially in times of market volatility.
- Second-Lien Mortgages: Alternative lenders hold more second-lien mortgages, where they are not the primary lienholder on the property. In the event of a default, these lenders are second in line to be paid back, increasing their vulnerability if homeowners face financial difficulties.
The 2025 Mortgage Renewal Risk: Impact on Canadian Homeowners
One of the major concerns for CMHC is the wave of mortgage renewals set for 2025. Approximately 1.2 million Canadian mortgages will be up for renewal next year, many of which were initially signed when the Bank of Canada’s interest rate was around 1%. Given the significant rise in rates since then, CMHC anticipates increased financial strain among homeowners:
- Higher Monthly Payments: Borrowers renewing their mortgages at current rates will see a marked increase in their monthly payments. While the Bank of Canada has lowered its policy rate to 3.75%, the difference from 1% is significant, and further rate cuts may not be enough to counteract the financial impact on monthly budgets.
- Increased Debt Obligations: The CMHC report also highlights growing household debt as a concern. Rising mortgage payments, combined with higher costs on other loans and credit cards, could push many Canadians closer to financial distress.
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Rising Delinquencies Beyond Mortgages: Auto Loans and Credit Cards
The increase in mortgage delinquencies is part of a broader trend in rising consumer debt in Canada. The CMHC report notes that delinquency rates are also climbing for auto loans and credit card debt as many Canadians feel the impact of high interest rates and inflation on their finances. As the economy slows, more households are experiencing difficulty meeting monthly payments across multiple credit products, putting further pressure on household finances.
Implications for Canada’s Economy
CMHC’s report cautions that the strain in the mortgage market could have broader economic implications. As delinquencies continue to rise, the risk of a more widespread financial impact grows:
- Consumer Spending Slowdown: Higher mortgage and debt payments leave less disposable income, which could result in reduced consumer spending. This slowdown may impact various sectors of the economy, from retail to services, as households tighten their budgets.
- Potential Housing Market Adjustments: Rising delinquencies and increased risk in the alternative lending sector could lead to adjustments in housing prices, particularly if demand softens in response to higher borrowing costs.
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Navigating the Path Forward for Homeowners and Lenders
As the CMHC report underscores, Canada’s mortgage market is entering a phase of increased risk and complexity. Homeowners with upcoming renewals should be proactive in planning for higher payments, exploring potential refinancing options, and managing their overall debt load. Meanwhile, lenders and policymakers will need to remain vigilant in managing these risks to support both financial stability and the resilience of the housing market.
With the likelihood of further interest rate adjustments and ongoing economic uncertainty, the Canadian mortgage market will continue to be a space to watch closely in the coming months.