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Mortgage delinquencies for large balances

Delinquencies rising for borrowers with $400k+ mortgages, CMHC report shows

While overall mortgage delinquency rates remain near historic lows, figures show an upward trend this year for borrowers with larger balances.

Data released this week by the Canada Mortgage and Housing Corporation (CMHC) reveals that borrowers with mortgage balances of $400,000 are seeing a rise in missed payments.

The national average for mortgages in arrears by more than 90 days has been stable at under 0.13% for the past 18 months.

Since the third quarter of last year, however, the arrears rate for borrowers with mortgage loans of $400,000 or more has risen by 0.02% (two basis points). Those with mortgages of $850,000 and more have seen an even more substantial increase, with the delinquency rate up 0.05% (five basis points) to 0.13%, according to CMHC’s Fall Residential Mortgage Industry Report.

“Mortgage loans with lower values (less than $400,000) had higher arrears rates than larger mortgage loans, but their arrears rate remained stable during this period,” CMHC noted.

CMHC’s figures also show that those who are 65 years or older have a higher rate of mortgage delinquency (0.20%) compared to those under the age of 45 (0.14%) and those between the ages of 25 and 34 (0.12%).

Many borrowers are facing challenges as their previously low mortgage rates are coming up for renewal at sharply higher rates.

In the first two quarters of the year, CMHC says more than 290,000 borrowers renewed their mortgages at a chartered bank at a “significantly higher” rate.

“The resulting increase in their debt-servicing costs is putting financial pressure on these borrowers,” it noted. “The decreasing ability of Canadians to make their debt payments is becoming a more significant vulnerability for the housing finance system,” the report said.

CMHC identified three factors contributing to Canadians’ increasing difficulties in making their payments: a high average debt-to-income ratio (171.9% as of Q2); a more than doubling of interest rates since early last year; and the fact that one in three mortgages has a variable rate.

While homeowners are still largely keeping up with their mortgage payments, CMHC drew attention to a more significant rise in credit card and auto loan delinquency rates, which have risen steadily over the past six quarters.

Over that period, credit card delinquencies are up 41 basis points to 1.44% and auto loan arrears are up 37 bps to 2.10%.

Alternative lenders picking up mortgage share

While origination activity was down sharply for traditional lenders in the first half of the year, alternative lenders and non-bank lenders saw a less pronounced slowdown and managed to pick up market share.

Chartered banks saw their purchase and refinance activity fall by 44% and 34%, respectively, CMHC’s figures show.

By contrast, assets under management by the country’s top 25 Mortgage Investment Entities (MIEs) was up by 7.1% year-over-year. Despite the continued strong activity, this represents a slowdown from double-digit growth seen over the previous five quarters.

In terms of market share, non-bank (and non-OSFI regulated) lenders saw their market share tick up to 2.2% from 2.1% a year earlier.

The Big 6 banks continue to dominate the market, however, holding steady with a market share of total outstanding mortgage debt of 73.1%. Credit unions saw their share tick down to 13.2%, while other chartered banks (5.8%), other non-bank lenders (4.6%) and Mortgage Investment Entities (1.1%) all saw their market share hold steady over the past year.

Looking specifically at newly originated mortgages as of the first quarter, the Big 6 banks have seen their share slip from 59.7% to 53.8%. Credit unions (+40 bps), MIEs (+280 bps) and other non-bank lenders (+200 bps) have seen sizeable increases in their market share.

Other key mortgage trends

The following are some of the other trends observed in CMHC’s latest Residential Mortgage Lending Report:

  • Rising proportion of uninsured mortgages
    • Uninsured mortgages (those that had a down payment of at least 20%) continued to see their share rise as of Q2, representing 73% of mortgages outstanding. That’s up from 71% in 2022 and a low of 45% in 2016
  • Borrowers opted for fixed vs. variable rates
    • $244.5 billion worth of fixed rate mortgages were lent by federally regulated financial institutions for new and renewed mortgages in the first eight months of the year vs. $20.1 billion for variable-rate mortgages
  • Term lengths growing
    • Borrowers are also shifting their preferences for longer fixed-rate terms of between three and five years (51%) compared to shorter terms of one to three years (21%). Another 17% selected 5-year (or longer) fixed rates, while 6% chose a variable rate mortgage
  • Amortizations continued to rise
    • As of Q2, the percentage of amortizations above 25 years rose to 63.5%, up from 62.6% in Q1 and 50.4% two years earlier
  • The trend towards lower loan-to-value (LTV) ratios has stalled
    • “The level of risk caused by high LTV ratios has decreased since 2019, but these ratios are still higher than they were in 2018,” CMHC said
    • In the first half of the year, LTVs of greater than 75% represented 43.7% of outstanding mortgages, up from 43.5% in 2022 but down from 44.3% in 2021