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Canadian Financial Institutions Expect Mortgage Defaults to Rise

What does the post-COVID future hold for mortgages?
By Sam Kamra, - REW Market Pro customer Sep 18, 2020

What has been an incredibly tumultuous year may get even worse as mortgage deferrals and CERB payments begin to come to an end. What will this mean for homeowners who have been struggling to pay their mortgage? Well, major financial institutions foresee a rise in the number of mortgage defaults in the upcoming months.

A mortgage default is when a homeowner violates one or multiple terms of their mortgage agreement. A mortgage agreement is a contract that lists all the terms and obligations associated with the mortgage. The most common default is typically a failure to make a required regular payment. This can lead to the lender taking the first steps towards a power of sale.


A look at the mortgage numbers

According to a recent survey conducted by the credit reporting agency TransUnion Canada, an estimated 2.6 million Canadians (just over nine per cent of credit consumers), have at least one active deferral. Of those deferrals, around 28 per cent of them are mortgages.

Also, as of the end of June, almost 760,000 Canadians (roughly 16 per cent of mortgage holders) have taken advantage of the mortgage deferral options that have been offered by banks since the pandemic hit Canada in March. So, what will happen to these homeowners utilizing these deferral programs when they end?

Evan Siddall, president and CEO of the Canada Mortgage and Housing Corporation (CMHC) warned back in May that “as many as one-fifth of all mortgages could be in arrears if our economy has not recovered sufficiently.”


Will a strong real estate market help?

On the bright side, there is a strong real estate market happening right now, even with so much financial uncertainty. The average home price was up 14.3 per cent in July compared to the year before. This is important for homeowners who are unable to keep up on their mortgage payments and will have to put their homes on the market.

Even if the housing-market rebound helps Canada’s chances of dodging a massive spike in defaults, there is another concern. Record-high household debt is a significant vulnerability that was visible before the pandemic hit.

A recent Bank of Canada analysis found that one in five households has barely enough financial buffers to make just two months of mortgage payments, and roughly one-third can make up to four months of payments. This is even more evidence that without steady income, many Canadian homeowners will be in a financially difficult position.


Will lenders help?

Some lenders have said that they will try and work with borrowers on a case by case basis to see what options are available. A major factor will be the labour market. Experts hope that it heals in a timely manner to help ensure homeowners can make their payments once deferral programs stop.

Luckily, the economy has recouped around 1.7 million of the estimated three million jobs that it lost in March and April. For now, Canadians must hope that those numbers increase to help struggling homeowners stay afloat once it’s time to start making their mortgage payments again.

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