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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.

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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. 

Mortgage Default FAQs

What happens if I default on my mortgage?

You must be very careful with a mortgage, because there are serious consequences if you default. Generally, the lender will start by sending you a letter or call, telling you to pay your outstanding balance before they’re forced to charge you penalties.  If you keep avoiding your payments, they may eventually seize and resell your property by foreclosure or under the terms of your mortgage contract.

What does mortgage default insurance mean?

Mortgage default insurance is a product that you have to buy when you make a down payment of less than 20% on your home at the time of purchase. Essentially, it helps protect the lender (not you) against any losses they incur if you should default on your payments. It normally costs around 2.8% to 4.0% of your mortgage amount. 

Can I finance my mortgage payments through my HELOC or line of credit?

If your income and savings aren’t good enough to make your mortgage payments on time, you could consider taking out a personal line of credit or a HELOC to finance them until your financial situation improves. This could be a far better solution than defaulting and could be more affordable as you can simply make interest-only or minimum payments.  Just keep in mind that either of these products could add a serious amount of debt to your plate, so you should only borrow one if your income is expected to fix itself soon.  
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Mortgage Maestro

Mortgage Maestro has been in business since 2017. It was established by Mr. Raymond D Williams with the mission to simplify the mortgage process for homeowners and home buyers. It is a digital mortgage brokerage that provides an entirely online mortgage application process. It uses its vast network of over 50 trusted lenders to help borrowers find the ideal mortgage solution. They currently offer mortgages, HELOCs, reverse mortgages and mortgage refinancing or renewals.

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