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With home prices through the roof and mortgage interest rates continuing to peak, Canadian homebuyers are choosing to stay on the sidelines and wait for a more affordable time to buy. In the meantime, current homeowners are at an increased risk of facing mortgage defaults. This is due to hefty interest rates and inflation.   

Let’s take a look at today’s housing and economic climate, how it’s affecting Canadian homeowners, and what Canadians can do if mortgage payments become too much to handle.

Why Do Canadian Banks Expect A Wave Of Loan And Mortgage Delinquencies?

Given the current housing affordability crisis, banks across Canada are anticipating a slew of loan defaults. The following factors are playing key roles. 

Effect Of Interest Rate Hikes On Loan Delinquencies

Over the past few years, mortgage interest rates have skyrocketed, making mortgages much more expensive than they were only a few months ago. In January 2022, rates were sitting at around 2.45%, the lowest they’ve been in about 10 years. 

At that rate, a $400,000 mortgage on a 25-year amortization period and 5-year term would come to monthly payments of $1,784. 

But at today’s rate of 5.6%, that same mortgage could push payments up to approximately $2,462 per month. That’s $678 more each month, or $8,136 extra per year that Canadian homeowners are paying. 

The Bank of Canada increased rates so aggressively over the past year. In 2022 alone, rates increased by 400 basis points or 4 percentage points. 

As a result, homeowners with outstanding loans are facing much higher housing costs. And when it comes time to renew their mortgages, many may find themselves in a vulnerable situation and may be at risk of losing their homes.  

More Canadians And Business Have Filed For Insolvency

Canadians holding a lot of debt are at an increased risk of filing for bankruptcy. With higher interest rates causing debt-servicing costs to spike, many Canadians with outstanding loans may find themselves unable to keep up with payments.

According to the Office of the Superintendent of Bankruptcy (OSB), in 2023, consumer insolvencies increased by 23.0%. That is the highest increase since 2009. Furthermore, consumer insolvencies increased by 4.4% from Q3 to Q4 in 2023. 

Business insolvencies, on the other hand, grew even more than consumer insolvencies. Increasing by 41.2% from 2022.

Businesses struggled immensely during the pandemic, and those that were able to survive took advantage of government-provided stimulus packages. However, as these payouts have stopped, many businesses that were just hanging by a thread are now no longer able to keep up with operating expenses and have resorted to insolvency.  

Job Loss

The Canadian labour market is relatively healthy, given the high inflation. In February 2024, the unemployment rate stayed steady at 5.8%. 42,000 jobs were added, which is double the forecasted amount.  

However, experts worry that this low unemployment rate cannot be sustained, particularly as efforts are made to lower inflation back to the Bank of Canada’s rate target of 2%.

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How To Avoid Loan Delinquencies Amid The Rise In Inflation And Debt-Service Costs

If you’re finding it financially difficult to keep up with all your bill payments, you may be at risk of defaulting on your personal loans or mortgage. Fortunately, there are some steps you can take to avoid loan delinquencies on your loans:

Use Your Home Equity To Consolidate Debt And Avoid Delinquencies 

If your home has increased in value since you first bought it, you may have enough equity to take out a home equity loan or a home equity line of credit (HELOC). You can then use that money to help pay your bills and avoid defaulting on your loans. 

Or, you may take out enough equity to consolidate your debt. Home equity loans are secured by the home so it often has low rates. This makes it a great option for consolidating high-interest debt like credit card debt. This will leave you with one lower-rate bill to manage every month, saving you time and money.

Where Can You Get A Home Equity Loan? 

You can access your home equity by applying with any major bank in Canada. However, you’ll generally require good credit and finances to qualify. If your credit or finances aren’t in the best shape, consider using a mortgage broker like Mortgage Maestro. They’ll help you find lenders willing to work with you based on your current financial situation. 

Moreover, whether you want to tap into your home equity, refinance your mortgage or  purchase a home, Mortgage Maestro can find you the best rates, 

Avoid Delinquencies By Deferring Your Loan Payment 

If you’re having trouble keeping up with your mortgage payments, consider calling your lender and asking them to have your loan payments deferred. By taking a month off of paying your mortgage, you can use that money to put towards your next bill payments. 

Skipping a month’s payment will have no effect on your credit score and can give you a quick break from your bills to help you catch up and improve your cash flow situation. 

Call Your Bank To Reduce Payments And Avoid Delinquencies

You may have been comfortable with your current mortgage payments when you first took out your mortgage, but maybe today is a different story. Perhaps you chose higher payments when you bought your home when rates were super low. But with rates as high as they are today, your mortgage payments may be much higher, especially if you opted for a variable-rate mortgage

Or, perhaps your income situation is simply no longer sufficient to comfortably cover your mortgage payments. Whatever the case may be, you can speak with your lender to see if it’s possible to have your payments reduced. This can be done by extending the loan term or refinancing your mortgage with a lower interest rate, which you may qualify for if your credit score has improved.  

Why Canadian Borrowers Have Slowed Down With Mortgages?

Canadians aren’t applying for mortgages as much as they may have in recent years. Fewer homebuyer hopefuls are taking the plunge into homeownership as soaring home prices and interest rates continue to get in the way. 

Right now, the average price for a home in Canada is $685,809, according to the Canadian Real Estate Association (CREA). Mortgage rates have also reached their peak. The latest posted rates offered by Canada’s six major chartered banks sit at 5.6% for 5-year fixed-rate mortgages. 

These kinds of numbers are making it nearly impossible for many Canadians to get into the real estate market. And the situation is even more dire in more expensive markets like Vancouver and Toronto. Here the average home prices are well over the $1 million mark. 

Final Thoughts

Rising interest rates, expensive home prices, and the pressure of inflation have created an ongoing housing affordability crisis that is putting many Canadians at risk of mortgage defaults. If you’re a homeowner who’s having trouble keeping up with your loan payments, reach out to your lender to find out what your options are, or consider tapping into your home equity to ensure your bills are paid until your financial situation improves. 

Mortgage Delinquency FAQs

What is the mortgage delinquency rate in Canada?

According to the CBA, there are $9,057 residential mortgages in arrears in Canada.

How many missed mortgage payments before foreclosure in Canada?

While there is no specific number of payments you can miss before foreclosure in Canada, most lenders will start repossession after 3 to 6 months of missed payments.

What is a mortgage in arrears?

A mortgage is in arrears when you’ve missed your payments by 3 to 6 months.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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