CMHC Residential Mortgage Report Highlights Rising Risks Amid Delinquency Growth and Shift Toward Alternative Lending

Canada’s housing market is steady, yet growing concerns within the mortgage sector reveal emerging risks. The latest Residential Mortgage Industry Report from the Canada Mortgage and Housing Corporation (CMHC) highlights rising mortgage delinquencies, an increased reliance on alternative lending, and significant financial impacts for borrowers facing mortgage renewals. These trends, fueled by elevated interest rates in Canada and household debt, signal a need for cautious financial planning among Canadian homeowners.

Key Takeaways

• Mortgage Delinquencies Rising: Up to 0.19% in 2024 as financial pressures grow.
• Alternative Lending Risks: MIC delinquencies hit 5%, raising concerns.
• Renewal Shock Ahead: 1.2M mortgages face higher rates in 2025.

Delinquencies on the Rise

Mortgage delinquencies, defined as loans over 90 days past due, reached 0.19% of the market by Q2 2024, up from 0.14% in 2022. Although this figure remains below pre-pandemic levels (0.28% in 2019), CMHC notes the potential for further increases due to mounting financial pressures on households, potentially nearing pre-2020 rates by early 2025. The rise in delinquencies may also reflect an overall financial strain as elevated shelter and living costs from higher interest rates continue to impact Canadian borrowers.

Alternative Lending Risks

Canada’s alternative lending market has grown significantly, serving higher-risk borrowers who may not qualify for mortgages and loans from traditional lenders or banks. Mortgage Investment Corporations (MICs) reported a steep increase in delinquency rates in the single-family home segment, climbing from 1.7% in Q4 2022 to 5% in Q2 2024. Alternative lenders are increasingly exposed, with higher loan-to-value ratios as they may be in second position to first mortgages, indicating an elevated risk profile for the sector with defaults continuing to rise.

A Looming Renewal Crisis

An estimated 1.2 million fixed-rate mortgages, totalling over $300 billion, will be up for renewal in 2025. With over 85% of these originating when the Bank of Canada’s policy rate was at or below 1%, many Canadian homeowners could face a renewal shock, potentially increasing monthly payments by 30% or more. This could considerably strain households, especially those already managing high debt levels, as interest rates are projected to remain well above pre-pandemic lows.

Broader Economic Implications

The financial strain extends beyond mortgages, as delinquencies in other credit products — such as auto loans and credit cards — continue to climb. Auto loan delinquencies, for instance, rose to 2.42% in Q2 2024, reflecting an uptick in consumer debt distress. These rising delinquencies could indicate additional mortgage default risks as Canadians grapple with rising costs and interest rate adjustments.

StatsCan reported in its Labour Force Survey (LFS) for October 2024 that nearly 3 in 10 Canadians (28.8%) aged 15 and older reported living in households that struggled to meet essential expenses like transportation, housing, food, clothing, and other necessities over the previous four weeks.

Although this percentage is lower than in October 2023 (33.1%) and 2022 (35.5%), it remains significantly above the 20.4% recorded in October 2020. This ongoing trend highlights the financial strain many Canadian households experience, particularly in the face of rising Canadian home prices and economic uncertainties.

Quebec residents were the least likely to report financial challenges, with only 22.3% facing household difficulties, in contrast to higher rates in Ontario (31.7%) and Alberta (31.3%), which exceeded the national average. Renters faced steeper challenges, with 39.2% reporting financial strain, compared to 24.3% of homeowners. Immigrants, especially those who arrived in the past decade, were among the most affected, with over 4 in 10 (41.2%) newcomers facing household financial difficulties. These figures dropped slightly for long-term immigrants who have been here for more than 10 years (31.2%) and those born in Canada (25.8%).

Investment Property Lending Growth

Canada’s mortgage market has seen a notable shift, with 17% of new mortgages now issued for investment properties, up from 13% in 2019. This trend underscores an increase in real estate investment interest, particularly in the rental market, as investors look to capitalize on housing demand.

Future Market Trends and Debt Growth

While Canada’s housing market shows resilience, total mortgage debt growth has remained modest at 3.5% year-over-year, reaching $2.2 trillion by July 2024. Many Canadians are holding off on home purchases in anticipation of future rate cuts. If rates drop, a spike in homebuying activity may follow. Proposed government measures, such as expanded 30-year amortization periods, could further stimulate housing activity, offering additional opportunities for prospective buyers.

Looking Ahead

CMHC suggests that additional interest rate cuts by the Bank of Canada may offer some relief to Canadian borrowers, though these potential adjustments may be limited. Employment stability remains crucial, as any job market downturn could heighten delinquency rates. Homeowners renewing mortgages at elevated rates should prepare for potential financial adjustments as Canada’s evolving economic landscape continues to shape the mortgage market.

How Mortgage Experts Can Help

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