Canada’s Mortgage Lenders Have Set Aside A Record Amount For Bad Loans

Canada’s real estate markets are booming, but lenders are preparing for mortgage losses. Bank of Canada (BoC) data shows the allowance for credit losses due to mortgages reached a record high in Q3 2020. The record was reached with the biggest surge in the annual rate of growth since the Great Recession.

Allowance For Credit Losses

Today’s data point is the allowance for credit losses, specifically for mortgages. You might have already guessed what this is – the amount banks set aside in the event of non-payment. When lenders expect a loan has become unrecoverable, they have to add more money to this pile. We’re going to be looking at the aggregate amount across all lenders. 

Canadian Mortgage Lenders Increase Loss Allowances By 54%

The amount set aside for losses has climbed to a new record high, and is growing unusually fast. Allowances reached $3.9 billion in Q3 2020, up 22.01% from the previous quarter. This represents an increase of 54.11% when compared to the same quarter last year. It’s not just a record high for dollars, but also the highest rate of growth in over a decade.

Allowances For Credit Losses – Mortgages

The aggregate allowance for credit losses at Canada’s chartered banks, in Canadian dollars per quarter.
Source: BoC, Better Dwelling.

Biggest Growth Loss Allowances Since Great Recession

Mortgage loss allowances at Canadian lenders grew at the fastest pace since the Great Recession. There’s been consistent growth since 2018, but the annual rate of growth has been tapering. That is, until the most recently reported quarters. Both Q2 and Q3 in 2020, showed a very large surge in growth. It was Q3’s annual growth that was the largest print since 2009 though.

Allowances For Credit Losses Growth

The 12-month growth rate for the allowance for credit losses on mortgages.
Source: BoC, Better Dwelling.

Canadian mortgage lenders are preparing for record mortgage losses, but this is unusual. Large growth in this area historically occurs around market slow downs. Naturally, it’s odd to see it occur while almost every market reports record home sales. Seeing lenders prepare for a default event is great for lenders, who won’t be caught off guard. However, it’s generally bad for the borrowers that are showing signs of stress, instead of selling into a low inventory market.

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  • Robert 3 years ago

    Q3 2020 is already old data. In Q3 they were preparing for deferral cliff which clearly did not happen. Like in 2008, RE market did not crash, so I’m sure they will reverse those funds set aside (like they did in 2010)

  • Vkob 3 years ago

    This was Q3 of last year. Nearly 4 months old now. These deferrals didn’t amount to anything other than home owners taking their mortgage payment and keeping it as cash on hand or investing it in the market.

    Canada, like every other major economy, will print as much money as necessary and will never allow assets to fall in nominal value again. At least not during this generation’s life time.

    We are the new Lost Generation and our lives will mirror those in the 1930s.

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