Canada’s mortgage lenders have seen the arrears rate fall down to pre-pandemic levels. The composition of that rate is now totally different though. Statistics Canada (Stat Can) data shows us the number of mortgages in arrears over 90 days at non-bank lenders for Q3 2020. The rate of arrears is now back to where it was a year ago, but uninsured mortgages now have a lower rate. Making up for the lost ground are insured mortgages, typically held by newer home owners. These borrowers have an arrears rate that’s now 50% higher than their uninsured peers.
Uninsured Mortgages Vs Insured Mortgages
Uninsured mortgages are when the lender takes the hit for any losses in default. Consequently, risk controls are more stringent than one finds with insured mortgages. For instance, down payments are set at a minimum of 20% of the home’s value.
These borrowers also generally pay a higher mortgage interest rate, as risk compensation. On the upside, they’re saved from having to pay the bank’s insurance bill for their own loan. This is how a free market would operate, if lenders were responsible for all losses.
Insured mortgages are ones where the lender is guaranteed repayment. In exchange for an insurance premium, a borrower can put as little as 5% down on a home. In the event of a default, and the lender can recoup the money from the insurance company. If the insurance company runs out of cash, the government kicks in the difference. Having no downside, means borrowers are also generally treated to lower mortgage rates. There’s little to no risk for the lender, and even the risk for taxpayers is far off.
No risk for a lender doesn’t mean no risk for the borrower, despite what some think. Since the insured mortgages have small down payments, they can be wiped out more easily. Seeing a 20% or more drop in prices over a short-period is an unusual situation. Seeing a 5% drop isn’t all that unrealistic, even in a decent economy.
Borrowers with no equity end up in an interesting situation if forced to sell. In the event of unemployment, or an urgent need to move, they may have to pay out of pocket for things like selling fees. Further, if the sale doesn’t generate enough to cover the whole mortgage after fees, they’ll have to up it. In this case, some people end up being too broke to sell. That’s a thing, and it’s not all that uncommon. That said, there’s a whole other list of risks unique to insured borrowers.
Mortgage Arrears Rate Falls To Pre-Pandemic Level
The total number of mortgages under arrears hasn’t moved all that much. There were 4,069 mortgages in arrears in Q3 2020, down 7.35% from the previous quarter. Compared to last year, the number is 0.87% higher. When expressed as a rate for the total, we see a relatively similar issue of low growth.
The arrears rate fell back down to where it was a year before. The rate fell to 0.24% in Q3 2020, down 2 bps from the previous quarter. The previous quarter also happened to be the first full pandemic quarter, and the peak for the rate. Even though it looks like things didn’t move, there was a major shift in who was defaulting.
The Gap Between Uninsured and Insured Defaults Is Growing
The arrears rate for insured mortgages isn’t recovering as quickly as uninsured mortgages. Insured mortgages saw the rate of arrears over 90 days reached 0.31% in Q3 2020. This is 53% higher than the rate was for uninsured mortgages. The gap has been getting wider over the past year.
Canadian Mortgage Arrears Rate GapThe rate of arrears over 90 days for mortgages at Canadian non-bank lenders. Source: Stat Can, Better Dwelling.
Over the past year, the gap between insured and uninsured arrears has grown. Insured mortgages at non-bank lenders had an arrears rate of 0.32% in Q2 2020. This was 41.68% higher than uninsured mortgages. In Q3 2019, a year before the latest data, the insured arrears rate was 0.28% – just 27.55% higher than uninsured mortgages.
Canadian Insured and Uninsured Mortgage Arrears Rate GapThe percent difference between the rate of arrears over 90 days for insured and uninsured mortgages at Canadian non-bank lenders. Source: Stat Can, Better Dwelling.
The total arrears rate might have only made a small spike, and came back down, but a lot changed during that period. Insured mortgages, saw the rate of arrears rise with the general mortgage market. This was expected as liquidity tightened, and buyers temporarily disappeared. After those liquidity concerns disappeared, the rate fell back to pre-pandemic levels. However, insured mortgages are now defaulting at a higher rate.
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