*This post was created in collaboration with Mortgage Maestro.
Although the country’s mortgage delinquency rate is at an all-time low of 14%, the Bank of Canada (BoC) raised its interest rates by 0.25-bps in July of 2023. This marks the 10th increase since March of 2022, leading to an overnight rate of 5% (up from 0.25% less than 1 year ago), which is bad news for a lot of homeowners out there.
Sadly, inflation could cause mortgage defaults to rise too, especially for people with variable-rate mortgages.
Read this to learn more about how mortgage defaults are going to affect Canada’s financial and economic conditions in the coming months.
What Does A Mortgage Default Mean?
Defaulting means the homeowner has broken at least one condition or obligation of their mortgage agreement. There are several events that the average mortgage lender would consider “defaulting” because it lowers the value of the property in some way, such as:
- Missing too many mortgage payments
- Adding another mortgage to the property
- Not having acceptable property insurance
- Not paying their property taxes
- Selling the property without permission (from the lender)
- Letting the property fall into an unacceptable level of disrepair
Why Are Mortgage Defaults On The Rise In Canada?
While there are many factors that have contributed to a rise in mortgage defaults across Canada, one of the largest is our unemployment rate, which is currently at 5.2%.
Although the unemployment rate is low enough to avoid a recession, it may cause the BoC to raise its interest rates again later in 2023. This could worsen Canada’s financial and economic conditions, upset our rate-sensitive housing market, and lead to a higher possibility of mortgage default among homeowners who can’t afford their payments.
According to the President and CEO of Scotiabank, around 20,000 borrowers are more vulnerable to mortgage default because they have high loan-to-value mortgages (LTV), weak credit scores, low chequing account deposits, and homes whose value is susceptible to market conditions.
How Will A Rise In Mortgage Defaults Impact Future Mortgage Applications?
With interest rates rising, the Office of the Superintendent of Financing Institutions (OSFI) is trying to decide whether to impose a new set of debt serviceability measures to see if mortgage applicants will be able to afford such large amounts of debt later on.
Although complementary, those measures could become pretty tough and may include:
- Interest rates affordability stress tests
- Debt-service coverage restrictions
- Loan-to-income (LTI) and debt-to-income (DTI) restrictions
Under Guideline B-20, Canada’s mortgage stress test now has a minimum qualifying rate of 5.25% OR the greater of the contract rate, plus 2%, for an uninsured mortgage.
Can You Qualify For A Mortgage In Todays Economy?
The OSFI may impose one or more of the measures above, based on the input it gets from its proposed changes to Guideline B-20. Predominantly, the OSFI is now considering new loan-to-income and debt-to-income restrictions, like setting a total limit on mortgage size based on an applicant’s income.
For instance, they could soon tell financial institutions that they can no longer devote more than 25% of their mortgage book to applicants with LTI ratios of 450% or more.
This could make getting a mortgage with a traditional lender a lot more difficult. Thankfully, there are a number of mortgage lending institutions in Canada that offer mortgages, some of which have more flexible requirements.
Pro tip: Be sure to check your credit score prior to applying for a mortgage. Higher scores can help you look like a responsible borrower.
If you’re looking for custom mortgage offers based on your unique needs and financial situation, apply with Mortgage Maestro. They’ve partnered with over 50 mortgage lending institutions that cater to a variety of borrowers.
How Is The Current Economic Landscape Affecting Mortgage Defaults In Canada?
As mentioned, the state of Canada’s economy could be particularly bad for borrowers with variable-rate mortgages. Even borrowers renewing fixed-rate mortgages can expect their payments to rise by several hundred dollars, which can lead to insolvency for some.
Even though variable-rate homeowners with fixed payments can be less susceptible to rising interest rates, more of them are now at risk of hitting their trigger rate; which is when their mortgage payments will only cover their interest and non of the principal.
Other groups that are vulnerable to this type of danger include borrowers who have:
- Multiple properties with variable-rate mortgages on them
- Mortgages held by private or alternative lenders (where rates tend to be higher)
- Home equity lines of credit (HELOC) with large outstanding balances
Worried About Your Mortgage Going Into Default?
If so, make sure to speak with your mortgage lender before you accumulate more debt than you can afford and your financial situation takes a turn for the worst. With a bit of time and negotiation, you may be able to work out a solution that suits your finances better.