Housing market slowdowns and debt delinquencies push arrears to a breaking point in major cities
Mortgage arrears in Toronto could climb to levels not seen in over a decade, Canada Mortgage and Housing Corporation (CMHC) has warned.
Rising interest rates, cooling housing markets, and increasing non-mortgage credit delinquencies are putting homeowners under significant financial strain. Vancouver faces similar risks, with arrears potentially reaching 2015 levels.
While Canadian homeowners have shown resilience amid rising mortgage costs, the next six to 12 months could present a breaking point for many. Mortgage arrears, although still historically low, are beginning to rise and are expected to accelerate over the next year, particularly in Toronto and Vancouver.
Warning signs
CMHC’s analysis showed that resilience will be tested as economic uncertainty persists and high interest rates affect those renewing their mortgages.
In Toronto, where there are more homes for sale than buyers, struggling homeowners are finding it harder to sell their properties to avoid financial trouble. CMHC identified the sales-to-new-listings ratio, a measure of market activity, as a crucial predictor. When this ratio declines, arrears tend to follow within 6 to 12 months.
Rising delinquencies in non-mortgage credit products, such as credit cards and auto loans, are also early warning signs of future mortgage arrears. Initially, homeowners prioritize mortgage payments, but financial strain often leads to trouble across all debts within six to 12 months.
The report expects Calgary, Saskatoon, and Halifax to maintain low arrears rates, close to post-pandemic levels. Winnipeg also showed stability, though recent declines in credit scores and increases in non-mortgage delinquencies could signal emerging risks.
Meanwhile, Toronto and Vancouver are in a more precarious position.
Toronto could see arrears rates soar to 2012 levels, driven by a sluggish housing market and growing non-mortgage credit delinquencies. Vancouver’s arrears may rise to a point not seen since 2015, as high inventory levels and slowing sales limit homeowners’ ability to exit the market.
Montreal, Ottawa, and Edmonton presented a more uncertain outlook. Mortgage arrears are expected to stay within post-COVID ranges, but sharp increases in non-mortgage credit delinquencies across these cities warrant further monitoring, CMHC said.
Mortgage renewal shock
The "mortgage renewal shock" is a looming challenge for over a million Canadian homeowners whose mortgages will renew at higher rates in 2025. Combined with inflation-driven reductions in disposable income and rising unemployment, this could push more households into arrears.
RBC recently pointed to the softening labour market as a greater threat to the economy than mortgage renewals, adding another layer of concern. Rising unemployment could further limit homeowners’ ability to manage increasing costs.
Read next: How stable is Canada's mortgage market?
CMHC called on financial institutions to support struggling homeowners through alternative payment arrangements and other tailored measures. The new Canadian Mortgage Charter offers additional guidelines for lenders to address financial distress.
"Complacency is not an option," CMHC said.
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