1 in 5 at High Risk of Mortgage Default

On October 9th, 2020, two RBC Capital Market analysts report Canadian mortgages are at risk of mortgage default.  It’s no wonder, as the COVID-19 pandemic continues to exert financial pressure on homeowners. If the pandemic continues over the next few months, what options do Canadians have?  Homeowners tap into their home equity to help weather the storm.

mortgage default

Mortgage Deferral Payments Ending

Since March, 2020 (the beginning of the pandemic) homeowners took the option to defer up to 6 months of mortgage payments. According to TransUnion Canada, around 2.6 million Canadians opted to have at least one deferral payment.

As the deferral payments are coming to an end, and with no end in sight for the COVID-19 pandemic, there has been growing concern of mortgages defaulting.  

In fact, currently 11% of mortgage borrowers from Canadian banks are not making payments.  That represents about $175 billion of mortgage debt.

Analysts Concerns

The Financial Post reports: (source)

“We believe 10% to 20% of mortgages under deferral are at a higher risk of defaulting. We are most concerned about borrowers on a deferral program who are unemployed (and were receiving the Canada Emergency Response Benefit, or CERB) and borrowers on a deferral program who are employed but are earning less than what they earned pre-COVID,” wrote RBC analyst Darko Mihelic and senior associate Sanly Li in a report earlier this week.

“We are also concerned about borrowers not on a deferral program but are facing some form of financial hardship. If 20 percent of mortgages under deferral eventually become delinquent in Canada, this equates to a mortgage delinquency rate of 2.3 per cent which is almost 4 times higher than the peak Canadian mortgage delinquency rate over the past 30 years; however, we have reasons to be optimistic that this high level of default will not occur.”

Planning Ahead to Weather the Storm

Government support and benefits, such as the Canada Emergency Response Benefit, has helped homeowners and small business owners.  However, once these benefits run out, the default problem could resurface.

In general, Canadians have done fairly well to cope during the pandemic.  For example, they had reduced their credit card balances by around $87.1 billion by the end of the third quarter.  To accomplish this, many homeowners have taken advantage of their home equity to consolidate debt. How is this accomplished? By paying off high-interest credit cards and instalment loans with a single lower interest home equity loan.

Other homeowners have created their own cushion of cash reserves, again using the equity in their home. Hence, homeowners create their own “emergency income replacement.” Or, the cash reserve could help a small business stay afloat.  A homeowner may also choose to do some home renovations to help increase the value of their home.

Homeowner With Finances Impacted by COVID-19?

To avoid a mortgage default, borrowers should act quickly dealing with their bank deferrals.  Now is the time to act and determine the right course of action.  Contact us anytime to help you navigate through your options.

Victor Camba B.Eng

Victor is a leader in sales and business development, with nearly 20 years experience in alternative mortgages and private lending in real estate. His ongoing success has been attributed to his proven ability to connect and cultivate relationships with clients, investors and advisors. He has a successful track record of identifying and developing proven sales strategies for investments and financing instruments, mortgages, and insurance. By providing customized marketing and sales collateral, coaching and training, he has helped clients achieve sustainable prosperity and build long-term relationships.