Canadian Mortgage Arrears Rate To Rise 50% In 2024: Fitch

One of the world’s largest credit rating agencies sees a bumpy road for Canadian mortgages. Fitch Ratings’ latest Global Housing & Mortgage Outlook shows the mortgage arrears rate rising modestly in Canada in 2024. Even more distressed sellers are seen, but pent-up demand will help to absorb many before they fall behind. The turbulence is forecast to subside as quickly as the end of next year, improving with the economy and rate cuts. However, it won’t be a return to record setting lows for mortgages. 

Canadian Mortgage Arrears Rate Expected To Climb 50% By Year End

Canada’s mortgages in arrears are expected to see a sharp increase after the recent record low. The arrears rate is forecast to rise to 0.25% to 0.3% by the end of the year. If it hits the high end, the rate will have climbed 50% from the end of last year, and doubled the record low also in 2023. 

Canada’s “Pent-Up” Demand To Absorb Even More Distressed Sellers

The steep climb is going to be felt, but the rate seems relatively low from a global standpoint. Don’t let that fool people into thinking a large share of sellers won’t be distressed. They attribute the low arrears to a cushion of equity and pent up demand. Forced sellers will be able to absorb price cuts with the substantial equity gained over the years.

“Canada’s target of increasing immigration is adding to the demand already there from people who have been waiting to get into the real estate market,” explains Susan Hosterman, Senior Director of North American RMBS and Covered Bonds at Fitch Ratings.  

The report was authored largely before reduced immigration targets were confirmed. It’s unclear if, and how, a reduction would change their outlook.

Canada has also become unusually flexible with its mortgage regulation to prevent defaults. Since the country’s regulators are no longer enforcing the maximum amortization in many cases, this has led to lenders extending loans indefinitely, preventing defaults.

“Additionally, banks are working to make repayments more affordable by re-amortising loans over a longer term and working with borrowers in distress to avoid foreclosure where other options are not available,” she notes. 

Canada’s Rising Mortgage Arrears To Improve With Economy

The agency attributes the market downturn to a general erosion of market fundamentals. “The modest rise in arrears will be driven by high interest rates, a weakening economy, lack of affordability and softening home price growth,” explains Hosterman.  

Canada’s economy is only expected to experience a hiccup, not a long downturn. Improvements are forecast as early as next year, and the agency sees that helping with mortgages. They don’t see a return to record lows, but forecast the arrears rate will fall within the range of 0.2% to 0.25% by the end of 2025. Potentially still higher than they are today, but not as sharp of an increase as expected later into this year.