How stable is Canada's mortgage market?

Canada’s banking regulator flagged the mortgage market as a significant risk to the national financial system in May, underlining the threat posed by a looming wave of mortgage renewals in the years ahead.

The Office of the Superintendent of Financial Institutions (OSFI) said in its annual risk report that borrowers who took out mortgages between 2020 and 2022 were especially vulnerable to some form of “payment shock” at much higher borrowing costs than their original contract rate.

Elevated household debt levels and mortgage renewal risk remain concerning – but the market’s overall health doesn’t appear to have deteriorated significantly throughout the year to date.

That’s according to the Canada Mortgage and Housing Corporation (CMHC), whose latest residential mortgage industry report highlighted those factors but saw little change in the overall outlook from earlier months.

CMHC – the national housing agency – releases two studies per year on trends in Canada’s mortgage market, in spring and fall.

“Nothing drastic” has changed in the market’s performance compared with earlier in the year, CMHC’s senior specialist, housing research Seamus Benwell (pictured top) told Canadian Mortgage Professional. “I don’t think there’s anything too different,” he said.

“One thing that we’re keeping our eye on is delinquency rates for other credit products, and in the first half of 2024 we did see delinquency rates on credit cards, lines of credit, and especially auto loans really increase – and those tend to be leading indicators of mortgage delinquencies.”

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While mortgage delinquency rates continued to increase (reaching 0.19% in Q2 of this year) and are forecast to rise further, they currently remain below pre-pandemic levels and post-1990 averages.

It remains difficult to say how high they might climb next year, Benwell said. “[Delinquency] rates, discounting pandemic effects, are going to be largely influenced by unemployment rates and what’s going on with the general economy,” he said.

RBC Economics reported a notable rise in home resales for October, with early data from local real estate boards showing strong gains in major cities from September levels.https://t.co/sqHU8qTNsS

— Canadian Mortgage Professional Magazine (@CMPmagazine) November 8, 2024

“More broadly, what we’re seeing is that lenders are increasing their allowances for expected credit losses – so they’re expecting that delinquencies will continue to go up in 2025.”

The agency isn’t discounting the risk of pain for Canadian borrowers in the year ahead, even despite the Bank of Canada’s pivot in recent months toward a rate-cutting strategy that’s seen its benchmark rate fall by 125 basis points since June.

Many economists also believe softening inflation and a cooling labour market suggest further rate reductions are on the way in the coming 12 months.

Those cuts may make the renewal crisis somewhat less acute, Benwell said – but about 1.2 million fixed-rate mortgages coming up for renewal next year, with about 85% having originated when the central bank rate was at or below 1%, remains a sizeable number. “If you think about a borrower who originally got their mortgage in 2020 or 2021, where interest rates are now is still significantly higher than it was then,” he said.

“So it’s better that they’re renewing now that interest rates have gone down a few times – but it’s still, again, significantly [above] what they’ve been paying for the last few years.”

Shorter-term mortgages remain most popular

Borrowers still appear reluctant to choose five-year, fixed- or variable-rate mortgages in the current climate, meanwhile, with both representing a “small share” of newly extended loans, according to CMHC’s report.

Instead, the expectation of lower rates down the line is pushing a majority towards other mortgage types, with fixed rates having ticked lower during the second half of 2024 and further Bank of Canada rate cuts seemingly in the cards.

In July, just 9% of newly extended mortgages had a variable rate – compared with 20% earlier in the year – and five-year fixed rates accounted for just 12% of the total originated that month.

“We’re still watching how interest rate fluctuations are impacting the markets,” Benwell said. “Shorter-term mortgages, three- and four-year mortgages are the most popular.

“People are still staying away from the traditional five-year fixed-rate mortgage just because they expect interest rates to go down in the coming years.”

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