From a financial point of view, it’s really important for homeowners to pay their mortgage on time. In Canada, this is a big deal because over 75% of household debt is due to mortgages.
With higher interest rates, expensive housing, and the rising cost of living, Canadians are feeling the pinch on their monthly budgets. These money pressures, along with a small increase in unemployment, have led to more people falling behind on their mortgage payments (over 90 days late).
People are changing how they use credit, spending their savings, and falling behind on credit card, car loan, and line of credit payments. This shows that Canadian mortgage holders might not be as financially strong as we thought.
In fact, a survey in 2024 showed that almost a quarter of people are worried about making their mortgage payments. With a softer job market this year, it looks like more mortgages will be overdue, reaching pre-pandemic levels by the end of the year.
Household debt is at an all-time high, and many people are having financial troubles. This makes household debt a big worry. Policymakers and the financial sector are keeping a close eye on the risks to the economy and financial system, as a sudden shock could push more homeowners into default.
Key Highlights:
- Many indicators suggest that more mortgage consumers are under financial pressure.
- The savings built up during the pandemic are used up. Low to mid-income households are using their savings to get by.
- We expect overdue mortgages to reach pre-pandemic levels (0.25%) by the end of the year. Better employment in 2025 and tight housing market conditions should help limit the increase.
Mortgage Arrears: Only Part of the Story
Usually, the share of overdue mortgages is seen as the main sign of financial stress for homeowners. But this measure only gives a glimpse of the whole picture since it’s a lagging indicator.
If a household has missed its mortgage payment for over 3 months, it’s likely they’ve been facing financial stress for longer. Canadian homeowners often prioritize mortgage payments over other debts and non-essential expenses.
So, early financial stress often leads to reduced savings and lower spending. Under more financial pressure, households may tap into savings or borrow more. If the financial stress continues or worsens, they may sell assets to keep up with mortgage payments. Prolonged stress can lead to missed mortgage payments, putting them at high risk of default.
In recent months, we’ve seen a gradual increase in overdue mortgages from low levels, with over 12,600 mortgages now being over 90 days late.
Indicators of Increasing Mortgage Arrears
The financial stress faced by households can be seen through several timely indicators:
- The savings built up during the pandemic are exhausted. Recent data shows mortgage borrowers with a higher chance of bankruptcy have increased their debt. The Spring 2024 Residential Mortgage Industry Report shows an increase in borrowers likely to file for bankruptcy.
- More debt is being used to pay other debts. The increasing share of borrowers with low credit scores and higher bankruptcy chances suggests that borrowers are either asking for more debt or using up their revolving credit (like credit cards or lines of credit) to make monthly payments.
- Low- to mid-income households are using up their savings to make ends meet. At the end of 2023, the average household savings rate was stable at 6.2% (peaking at 11% during the pandemic). However, higher-income households had net savings of 12.6%, while lower-income households are dipping into their savings every month. The rising costs of housing and essential goods have outpaced income gains for low-income families.
