- Changing landscape: In the first half of 2023, home sales slumped, impacting new mortgage activity.
- Consumer behaviour is shifting: Canadians favour longer mortgage terms and extended amortization periods.
- Debt concerns: While mortgage arrears remain low, some consumers face debt challenges, particularly with auto loans.
The Canadian residential mortgage landscape is evolving
In the Canadian residential mortgage market, significant shifts are occurring. A decline in home sales led to a deceleration in new mortgage activity in the first half of 2023. Despite this slowdown, outstanding mortgage debt continued to rise, particularly for uninsured mortgages.
Consumers are moving away from shorter mortgage terms, signaling lower expectations of immediate interest rate decreases. Instead, 3-to-5-year terms have become the most preferred choice. The extension of amortizations beyond 25 years for most newly issued mortgages is another noteworthy trend. This suggests a shift towards longer repayment periods.
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CHARLES: The Residential Mortgage Industry report provides economic analysis of the residential mortgage industry in Canada.
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(Visual: Two people are shown in conversation. They sit across from one another at a boardroom table. The two individuals are Charles Sauriol, Communications & Marketing, CMHC, and Tania Bourassa-Ochoa, Housing Researcher, CMHC.)
CHARLES: Hello, my name is Charles Sauriol and I'm pleased to be hosting this discussion on our latest residential mortgage industry report, or what we call the RMIR. I'm joined today by our mortgage industry research expert, Tanya Bourassa Ochoa. She's been leading this work at CMHC for the past few years. Bonjour Tanya, how are you?
TANIA: Bonjour, very good, thank you.
CHARLES: This report we release twice a year, so the previous report we released earlier this year. And at that time, credit was creeping up. Borrower behavior was changing amiss higher lending rates. Here we are later, six months later, and with a new report. And really what's changed?
TANIA: Well, I mean, first of all, it's not a surprise with the very strong and rapid interest rate hike. It did have the effect of a cold shower on the mortgage market. So, we are seeing overall mortgage debt that has been slowing down quite drastically. But also what we're seeing is that those early signs of financial stress on homeowners are actually intensifying. And and so it's really telling us that Canadians are having a harder time to make their payments, even mortgages. So to answer your question, what has really changed? I mean, it's those earlier trends that we were seeing that are really growing deeper into the market.
CHARLES: It's more of the same, but just getting…
TANIA: More intense.
CHARLES: OK, intense, right. That's. And one of the topics we were hearing about is, is the effects of so many people in Canada is mortgage renewals. And, you know, I renew my mortgage this year. It was a little bit painful. And looking at this report, staggering numbers, nearly 300,000 renewals in the first half of this year alone. Right. It seems like a lot. How are homeowners adjusting to this new rate environment and ultimately higher mortgage payments?
TANIA: Yeah, well, exactly. 300,000, you're right, but that's only with Chartered Bank. So that number is actually quite larger and it represents a lot. It seems like a lot, but we're only talking 6% of all mortgages in Canada. But Canadians are really trying to find different ways to adjust to these higher interest rates. They're trying to do what they can at renewal in terms of the terms to make those payments smaller. And so, one of the things they're doing is choosing longer amortization periods. So that just means that you're going to be paying for longer, but paying less in the short term. And the other thing is that they're choosing slightly longer terms on their mortgages. And it's actually interesting because earlier last year we were seeing that people were using choosing one year, two years on their mortgages because they were expecting interest rates to go down further down the road. Now we're kind of seeing that these hopes are fading. And so Canadians are really locking in their mortgages for a longer period of time around 3 to 4 years.
CHARLES: So, and what does this exactly amount to in regards of increased payments and why so many this year?
TANIA: Well, actually, it's going to depend on the interest rate you had then and what you're locking in right now. Right. But approximately, we could expect between 30 to 40% increase on the mortgage payments, and that was for the mortgages that were renewed earlier this year.
CHARLES: So really, this is just the tip of the iceberg.
TANIA: Yeah, it is actually the tip of the iceberg. And when you think about it, actually, one out of three Canadians have a variable mortgage rate. So, they've already been experiencing to a certain extent these higher interest rates. But looking just around the corner, that's when the most significant interest rate shocks are going to be felt. Because in 2024 and 2025, we're expecting at least 1.5 million mortgage borrowers that will be renewing. And why the greatest interest shock? Because for most of these borrowers, they've contracted their mortgage at one of the lowest low record interest rates, but they've also purchased or refinanced at the peak of the housing prices. So, this is really where the difference is going to be felt and where a really a bigger chunk of the budget at the end of the month is going to go towards these mortgage payments. However, delinquent mortgages are what we call a lagged indicator so what we mean by that is that if a household would be in a precarious financial situation or maybe financially strained, we wouldn’t see it as quickly in terms of mortgage delinquencies, but we would see it on other credit products. So now when we’re looking at credit cards, auto loans or even lines of credit, we are seeing an increase in delinquencies for these products, and it is telling us that some consumers are maybe having a harder time to reimburse their debt.
CHARLES: Right. So, let's look at the insured mortgage market and what this means for CMHC and our insurance portfolio. So, are we seeing more negative results? And can we talk about vulnerabilities for CMHC and ultimately taxpayers in this case?
TANIA: Well, one of the things that we've highlighted in the report is that there is a much higher share of uninsured mortgages, sometimes called conventional mortgages compared to insured. So just to give a little bit of a background. Mortgage default insurance in Canada is mandatory if the borrower has less than 20% cash down. So, this is going to provide the lender insurance against default from the borrower, but it's also going to allow the borrower to get a mortgage loan with the smaller cash down and at a more competitive interest rate. So today, three out of four mortgages in Canada are actually uninsured. And that's actually a very interesting because when we look a decade ago, it was quite the opposite. It was actually three out of four mortgages that were insured. So, there's been a series of mortgage regulations that have been put in place and that have contributed to this trend towards less insured mortgages in the market. Another one we could think of is the million dollar cap. Right. And when we think about housing prices and the average housing price in Vancouver or Toronto, while we're way above that price, we understand that mortgage insurance is taking a lesser share in the market as a whole. So, that being said, in the context where the insured space has reached record low levels now in 2023 and the fact that CMHC currently holds approximately 6.5% of the entire mortgage market. Well, in terms of our exposure to potential vulnerabilities, it is quite limited for the moment. And when we're looking at mortgages in arrears or when we're even looking at our claims, well, those are also historically quite low.
CHARLES: But down the road, what kind of what do you see? More claims, more arrears down the road eventually.
TANIA: So, at a general level, I did mention earlier on, we are seeing early signs that Canadians are having a little bit more trouble to make ends meet at the end of the month. So yes, we talk about arrears, and we look at mortgages and we see yes, there are indeed at historical low levels. But when we dig into the numbers and we kind of go and find what's hiding behind those numbers. Well, one hand and we talked about this before, but delinquency rates on auto loans, credit cards, lines of credit, they're all peaking up. And this trend has been continuing for a couple of a few quarters now when we're seeing first stage and second stage delinquencies, which is a very technical term, to say I'm late on my payments between 30 to 60 days or 60 to 90 days while we're seeing those go up as well. And, so, there are a couple of other indicators that are telling us that Canadians are having a harder time to make their payments.
CHARLES: So, let's switch gears a little bit and talk about household mobility, namely household debt. We released an article earlier this year stating that Canada had the highest level of household debt in the G7. So, what we know that it's coming around the corner. What does that mean for these households and that level of vulnerability?
TANIA: Well, you're absolutely right. I mean, households have high levels, peak high levels of debt right now and also the high costs of living. But on top of that, Canadians are facing the fastest and steepest interest rate hike in over 42 years. So, this we can't ignore that, that's adding additional financial pressure on Canadians and we're already seeing signs of that today. And, so, what's that going to be tomorrow? So, yes, while Canadians will do what they can to make ends meet and shift things around to make their payments on time, we can ignore the fact that this is putting these households at a much greater risk.
CHARLES: Well, now conclude a conversation for today. So, thank you, Tanya, for your insights. It's giving us a lot to think about, and I look forward to connecting again in six months to see how things have shifted and hopefully improve for Canadians.
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CHARLES: And thank you to our listeners today. Please visit CMHC.ca for a copy of the full report. We do want to hear from you. Feel free to leave a comment with your feedback on the report and this discussion. And stay tuned for more conversations with our housing experts and be sure to subscribe to our newsletter and our YouTube channel and also follow us on Twitter, LinkedIn and on all of our platforms on social media. Stay tuned for more conversations with our housing experts and our next RMIR in spring 2024. Thank you and have a great day.
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