HomeReal EstateTens of thousands of Canadians struggle to make monthly mortgage payments

Tens of thousands of Canadians struggle to make monthly mortgage payments

Tens of thousands of Canadians struggle to make monthly mortgage payments

Since March 2022, the Bank of Canada has been periodically increasing the country’s key interest rate. Seven interest rate hikes later the overnight rate is now at a staggering 4.25%, a dramatic increase from the beginning of 2022.

Tens of thousands of Canadian borrowers could be vulnerable to defaulting on their mortgages as rates rise and homeowners struggle to make monthly payments, according to the CEOs of the country’s largest banks.

Scotiabank’s incoming CEO said about 20,000 of the bank’s borrowers could be vulnerable, which represents about 2.5 per cent of the bank’s mortgage customers. The CEOs of several of Canada’s other big banks also said Monday that small percentages of their borrowers are at risk, potentially adding up to tens of thousands of Canadians.

On top of that, millions of the banks’ other borrowers are likely to face financial pain this year and next as they renegotiate fixed-rate mortgages or make ever-higher monthly payments on variable-rate loans.

Still, the bank CEOs, speaking at a daylong conference hosted by RBC, emphasized that they don’t expect a wave of mortgage defaults to seriously impact their own bottom lines.

“This is not a bank credit issue. This is an issue of consumer lifestyle,” said CIBC CEO Victor Dodig. “More money will have to go from discretionary spending to interest expense.”

The CEOs said that household savings built up during the pandemic, a strong labour market and an overall increase in home values in recent years should provide a cushion for most of their mortgage customers.

They said only a small percentage of borrowers — BMO’s Darryl White put it at 1 per cent for his bank while RBC’s Dave McKay pegged it as being in the “low single-digit percentage” range — are “vulnerable” to default.

Those customers tend to have low credit scores and own homes that are not worth much more than their mortgages.

Scott Thomson, who will take over the top job at Scotiabank on Feb. 1, said the bank’s estimated 20,000 vulnerable borrowers should be a “manageable-type situation for us.”

The number of Canadians who actually fall into arrears of three months or more on their mortgage payments is historically low — it hovered between around 0.25 and 0.5 per cent of mortgage holders for most of the past two decades, according to the Canadian Bankers Association. In any given month over that time period, a range of about 10,000 to 20,000 mortgages were in arrears.

Mortgagors with variable-rate mortgages who make fixed monthly payments of interest and principal have been most significantly impacted by the increasing interest rates as this has caused many variable mortgages to activate the “trigger rate” and, for some, the “trigger point.”

In general, many mortgages have reached the trigger point as interest rates have increased. To remedy this situation, lenders are taking different measures to hold off defaults and assist mortgagors who cannot manage growing mortgage payments. Some lenders are providing emergency loan modification options which will allow mortgagors experiencing significant financial hardship to extend their amortization periods to a maximum of 40 years leading to a significant reduction in the amount of each mortgage payment. The impact of increased monthly mortgage payments on Canadians as a consequence of the increased interest rates will be an important and continuing theme in 2023.

When it comes to higher payments, Dodig gave a few examples, noting that fixed-rate mortgage holders renegotiating this year can expect to pay an average of about $350 more per month while variable-rate mortgage payments will go up by about $700 per month.

On the bright side, Dodig said, the mortgage stress test (introduced by the federal government in early 2018 to guard against a rapid rise in interest rates) means that most customers facing renewals had to prove they could carry loans with interest rates of between about 5.2 and 5.4 per cent.

That’s only slightly below the rate they’ll be looking at for a new five-year, fixed-interest rate mortgage (about 5.45 per cent) and not far off from what they might pay for a variable-rate mortgage (6.05 per cent). In short, it might hurt, but they’ve already proven they can probably afford it.

McKay said more than 50 per cent of RBC’s variable-rate mortgage holders will have a “trigger impact,” meaning their monthly payments no long cover anything but interest.

In those situations, borrowers have to make a change, likely increasing their payments, but McKay said the bank’s careful look at its own extensive customer data suggests “the cash flow is there to absorb it and the collateral is there to absorb it to a large degree.”

Resilience in Canada’s labour market — the country added 104,000 jobs in December, Statistics Canada said Friday — should also help, McKay said, noting there is still a “strong demand for jobs.”

“We still have significant demand in construction, retail, hospitality and health care,” he said. “So if you’re displaced in one sector there is a job in this economy for you and that’s different than other recessions that we’ve been through.”

The big bank CEOs generally said they expect a mild recession at worst but added that they’re prepared for a more significant downturn.

They all said they have been able to adapt to new requirements to keep more capital on hand announced in December by the federal banking regulator, the Office of the Superintendent of Financial Institutions.

Peter Routledge, who leads the regulator, said during a speech at the conference that OSFI increased the capital requirement because it would “rather err on the side of acting too early than be criticized for acting too late.”

He said OSFI is prepared to respond to changing market conditions quickly and also noted that it is launching a review this week of mortgage-underwriting rules that will consider whether measures that go beyond the stress test are needed.

Routledge said he wants to ensure Canada’s banks are prepared for worse-than-expected credit losses, but he generally sounded an optimistic note, pointing to the recent jobs report and noting, “We’re not in bad times.”

Part of the article was reported by the Star.