House equity

Why we won’t see a wave of Canadians in mortgage default

Canadians will use their credit cards, fall behind on their utilities and juggle car payments. The one thing they don’t do in large numbers is fall behind on their mortgage payments.

GTA residents reeling from rising rates and inflation can take comfort in delinquent mortgage numbers that show losing a home to the bank is a rare event this side of the border. While there are challenges to overcome, there is no point in conjuring up scenes from the US subprime mortgage crisis and the global recession of the 2000s.

Our banking system, even the composition of our workforce and the cultural differences between the two countries have kept delinquencies low in Canada during tough economic times, according to housing and finance experts.

However, they do not overlook the fact that some Canadians are more at risk of defaulting on their mortgage.

Statistics show that mortgage default rates in Canada have remained low during the last global recession and other economic downturns, including the 2017 housing correction and the pandemic, said Tania Bourassa-Ochoa, specialist Mortgage Lending and Consumer Trends from Canada Mortgage and Housing Corporation (CMHC).

She says defaults — loans that are 90 days or more past due — are a good indicator of mortgage default rates.

“In Canada, mortgage delinquency rates are still significantly lower than what you would see in the United States,” she said.

“So even in the 1990s, where we had this peak, we were around 0.65% – less than 1%. In the United States, when there was the recession in 2008, (delinquency rates ) reached almost 11.12%,” Bourassa-Ochoa said.

At the end of last year, the crime rate in Canada was 0.19%, according to Equifax Canada. Ontario’s rate was 0.08% and that of the census metropolitan area of ​​Toronto was 0.07%.

Bourassa-Ochoa is among the experts who told the Star that there are tangible reasons why Canadians don’t default on their mortgage obligations nearly as often as in the United States. borrower — the cottage, cars and other investments. The same rules do not apply to all mortgages in the United States, where the lender is limited to only seeking security for that loan.

Moshe Milevsky, professor of finance at York University’s Schulich School of Business, expects average Canadians to keep their payments this time around as they have in the past. The problem, he says, is that averages tend to ignore outliers and for some that’s going to be painful.

It divides owners into three groups. The first group has already paid off their house, so the higher rates don’t matter to them. The second group still has a mortgage, but they will also have enough equity to get a loan on their house and be able to get through the pain.

It’s the third group that Milevsky worries about — people who have a relatively large mortgage and are spending more than 30 or 40 percent of their income to pay it off.

“On average it will be fine because (two groups) are fine. It’s for that other third that it’s going to be painful,” Milevsky said.

He says Canadians are trained from an early age to pay their mortgages even at the expense of other things.

“We are going to cut off electricity, heating and water, but we will not default on our house because it is a debt, it is something sacred. It’s something the bank lent to us and we feel obligated to pay it back,” he said.

Even Canadians in financial difficulty regard their home loan as “sacred”, says insolvency trustee Chris Welker of Welker and Associates in Kitchener.

“A lot of people we see have made their mortgage payments, but it’s at the cost of going into credit card debt or borrowing from high interest finance companies,” he said. declared.

In the first quarter of this year, mortgage delinquencies were 0.18% in Canada. That compares to defaults in 1.13% of credit cards, 1.83% of car payments and 0.1% of home equity lines of credit, according to statistics from CMHC and Equifax.

Welker says many people are still financing their homes and other debts using capital accumulated during the pandemic. But if you have more money going out than coming in, that bubble will eventually burst.

Mortgage broker Ron Butler of Butler Mortgages says it’s “Polyyanian nonsense” to think that Canadians “are particularly blessed people who believe in payments.” The real psychology behind low delinquency rates is a tale of 32 years of solid house price growth – because real estate values ​​have steadily risen, housing is seen as a safe and often profitable investment. Butler agrees, however, that’s not the reality for everyone.

When rates rise with a corresponding drop in house prices, nothing really happens for most people, even those who bought during the market peak late last year or early this year.

Even if you bought in the suburbs or the suburbs and your home value is now down 25 or 30% from the market peak in February, your loan has been stress tested, it has been properly subscribed and you still have your job. You can make your payments.

“You can’t do anything after that. You can’t move,” Butler said. “So at the moment, nothing is happening. People just make their payments.

But the roughly 4.5% of the GTA who have loans from alternative or subprime lenders are vulnerable, he said.

“People who got a mortgage a year ago are now getting a renewal and the rate is doubled. Their payments increase by 48 and 54%. It’s a real thing,” Butler said.

These lenders differ from banks by charging higher interest and giving more weight to the value of the property compared to banks which are more dependent on the borrower, he said.

They can always avoid the default. It’s possible they could still sell even in a tough market, or they could find a way to refinance or add tenants to their household. Still, Butler said, “That small percentage will feel that in a way that the rest of the proprietary public won’t.”

Welker says one of the biggest differences between Canadians and Americans when it comes to mortgages is that interest on a primary residence is tax-deductible in the United States, which encourages Americans to borrow as much as possible.

Royal LePage CEO Phil Soper, who has worked in both countries, agrees that the policy leads to an American mentality that leverage is good.

“That doesn’t exist in Canada. People north of the border are working to pay off their mortgages and they celebrate when they do,” he said.

Soper says 2008 was a far bigger economic event than the current period of inflation and rising rates. The Canadian default rate increased to around 0.45% in the 2000s, but “it’s a very, very low default rate, even though it’s gone from close to zero,” he said. .

He says Canada’s banking oligopoly also results in a high degree of standardization among a very small number of large lenders and therefore most mortgages in the country.

“We just don’t have small banks taking big risks to get market share,” he said.

“This can lead to less innovation in the market. But in turbulent economic times, you just don’t see the kind of defaults or bank failures. It just doesn’t happen in our model.

Finally, he says, part of the security of Canadian homeowners comes down to a little-talked-about fact — that there are more women in the Canadian workforce than in the United States, which means more two-income families. This has resulted in a slightly higher homeownership rate – about 5% higher – and reduced the risk of default.

“If you lose your job, you still have someone in that household who has an income,” he said. “It’s directly linked to our social safety net, our long maternity leave – to the possibility of having children and having a career.”

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