Here’s What Canada’s Mortgage Deferral Cliff Looks Like, And Why Experts Are Worried

Canadian real estate buyers are jumping in head first, since the recession didn’t impact housing. However, since the beginning of the pandemic, experts said no issues would be apparent until the end of the year. The reason is a term only finance and banking nerds have been using – the deferral cliff. The deferral cliff is the expiration of programs that bought distressed owners a few extra months. Until the deferral cliff arrives, we won’t see any of the problems in the housing market. Here’s when it’s coming, and when you should see an impact.

Mortgage Deferral Cliff

The mortgage deferral cliff is when payment deferral plans begin to expire. After the pandemic driven shutdown, Canadian and US governments scrambled to get banks to defer mortgage payments for the unemployed. Starting in April, people without income were allowed to delay payments for up to 6 months. This eliminated the spike in arrears we would normally see during a recession. It also happens to restrain inventory from hitting the market. As the six month deferral period ends, homeowners that aren’t back on their feet, are going to have to deal with their housing woes.

Industry experts warned mortgage deferrals give a false sense of security. Since people haven’t seen any defaults or distressed sales, moral hazard was created. That is, people now think housing markets have no risk. However, this is only temporary. As these deferrals expire, we approach the cliff. Once we get there, a significant number of people that haven’t got back on their feet will start to surface.

Most Canadian Mortgage Payment Deferrals Will Expire In October

Since the longest deferrals are six months, we don’t really see any issues pop up until October. In October, about ~500,000 mortgages should expire. Followed by another 221,000 in November, and a big dip lower to 15,000 in December. There’s a mild bump higher with 24,000 in January, and February won’t be known until the cut off is reached next month.

Canadian Mortgage Deferral Cliff

The estimated number of expirations of payment deferrals for Canadian mortgages.

Source: Bank filings, Better Dwelling.

Now, don’t confuse the expiration of payment deferrals with a spike in arrears rates. It takes 90 days of non-payment for a mortgage to fall into arrears. This means October’s surge wouldn’t see any contribution to arrears until January. November would be in February, etc… That said, rising arrear rates depend on liquidity.

If you can’t afford your home, what’s the first thing you do? List it for sale. The inability to pay doesn’t always turn into defaults when there’s buyers. Instead, people list their homes for sale and hope it sells and closes before the lender tries to claim it. Unless you’re not all that smart, this is the first thing you would look to do. In which case, we should see a spike in inventory first.

Rising inventory tends to give buyers more options, which turns into longer selling times. When you can’t dispose of your home in a timely fashion, that’s when defaults rise. This would explain why everyone from the CMHC to the Bank of Canada never expected arrears rates to rise this year. Rising inventory is expected later this year, and defaults are forecasted to climb next year.

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  • Jin 4 years ago

    Great explanation. I honestly had no idea why people like Siddall have been saying it’s coming at the end of this year. I thought it was due to employment falling and a second pandemic wave.

  • George 4 years ago

    They’ll just extend the deferrals not a big event.

    • Trevor Hare 4 years ago

      How would that work? The pension plans that own those mortgage bonds need to get paid, and would definitely sue the government of Canada if another deferral was instituted. Do you seriously think a fifth of all mortgages can remain in deferral indefinitely? Why would anyone bother paying their mortgage or rent ever again?

  • straw walker 4 years ago

    I really don’t think any can afford another deferral..Sooner or later these houses will have to be sold; or foreclosed on.

    • Ethan Wu 4 years ago

      CMHC did a presentation for the banking industry saying there’s no more deferrals on the table, so they need to make sure it’s clear to borrowers. Banks can only ignore not receiving payments for half a year. At some point, the lack of payments needs to be considered an increasing outstanding risk.

      I’m surprised accounting standards today allow it to not be classified as a default risk.

      • IamGroot 4 years ago

        Correct the CMHC is not prepared to defer however they are prepared to allow amortizations to be extended up to 40 years in hardship situations. No doubt there will be an element of fraudulent requests for extended amortizations here. This is why the banks aren’t too worried.

  • A Scott 4 years ago

    Anyone who has a mortgage coming due should have no problem increasing it. Most regular folks are working from home, or staying at home to collect the CERB and spending much less money. They will all be ok, but if they want to refinance, they can likely put $100K+ in their pocket on a typical 5 year mortgage renewal. Where I live in a small city my house is up $150K + in 4 years, over 50%, I can refinance and easily afford the current $731 monthly payment

  • Scott M 4 years ago

    I would add that probably 90% of payment deferrals for to take advantage or to be safe with the situation. The only people going broke are the rent payers as rent keeps going higheer and higher as taxes/fees/regulations make it so expensive to build, high increases in the population also make more people competing for fewer rental places

    • Trevor Hare 4 years ago

      Except that because immigration has effectively halted and foriegn students have left the country the population is shrinking at the greatest rate in history.

      • alvi 4 years ago

        You’re being a little dramatic with “the population is shrinking at the greatest rate in history”?

        • Jeff 4 years ago

          With all respect, I think Trevor might be right. Total number of births are steadily decreasing, which have been propped up by immigration. Take immigration away, and we are shrinking as a country… which is kind of insane.

          • alvi 4 years ago

            Declining birth rates are decades old, nothing new here,that is why countries have immigration

    • Big Bear 4 years ago

      High rents are never a problem long term. People simply leave

      • Labi 4 years ago

        This is something people in middle management will never understand. If you’re a professional, your skills fetch almost the same anywhere, or you can work remote.

        The only people stuck in the city paying a premium to be slotted in with other worker bees can’t imagine moving, because they can’t imagine a different dynamic.

    • C.D.R. 4 years ago

      I don’t know what city you live in; however, in Toronto rents have already dropped 15+% and many have been sitting for months. There’s a 100% increase in rental listings in central Toronto.

      With college/university students (domestic & foreign) doing their 2020/21 year online, much of that demand is gone.
      Immigration has effectively been halted and the population is shrinking at the greatest rate in history.

      There’s a divergence in prices happening where condos are going down, especially the small cramped units (1 bedroom <500 SF, 2 bedroom <650 SF, 3 bedroom <800 SF) while SFH with some land have increased.

      The higher average sales price for condos touted by TRREB is the result of sellers of smaller units moving up to something larger, hence the higher price.

      • Mike Hawk 4 years ago

        “the population is shrinking at the greatest rate in history”

        WW2 phoned… said you have no idea what you’re talking about :p

    • questionguy 4 years ago

      rents have been decreasing each of the last 3 months

      • churanmati singh 4 years ago

        Where rent is decreasing? Mine isn’t.churanmati

  • Helmut Schnell 4 years ago

    A lot of people used the deferral even tho they did not need to. It is human nature to do that when things like covid 19 happen. Adding those missed payments at the end is a drop in the ocean for most with such low interest rates. Cash flow is king and everybody wanted to be part of it.

    • Yi 4 years ago

      This is a myth. A bank won’t approve a deferral for more than a month unless you don’t have money coming in.

      • BDman 4 years ago

        You don’t know what your talking about. When the pandemic hit, friends of mine just called their bank and got a deferral. No questions asked.

        • alvi 4 years ago

          I head stories where banks themselves encouraged their clients to take the deferral, the banks called them first

    • Sara 4 years ago

      I know they are in downtown Toronto. I just signed a lease for a unit which was previously going for 3000 per month. People are desperate to rent. The owner for this unit went down $500. I was paying 2300 for a much smaller unit before.

      • Sara 4 years ago

        Oops first time commenting here so I replied to the wrong person. My bad. My response was to the gentleman asking where rents are going down.
        BDman is right. I work for one of the big 5 and there are no questions asked on deferrals by any of the larger banks.

        • alvi 4 years ago

          Is it true that in some cases the banks initiated the calls themselves about the deferral?

          • Sara 4 years ago

            Not where I am. They’d rather have people pay. For the initial 6 months, which the government announced, everyone came running to deffer on their own. However, as the government offered deferrals expire, they are looking at who is likely to be in trouble and reaching out proactively in those cases. But it isn’t to offer more deferrals. They might be offered a longer amortization like CMHC has for insured mortgages. And it won’t be a blind process either like the deferrals.

      • alvi 4 years ago

        Nice to see some of the steam taken out of rental market and people stepping up to take advantage

  • Rick Hyne 4 years ago

    We’re living in an illusion of an economy where stocks break records and millions of people are unemployed. Where retail sales are back pre covid levels yet we’re extending social welfare. Where housing prices and sales rise, but interest rates are held low.

    Mortgages are not the only thing deferred

    I expect to see an adjustment period as social supports are adjusted or removed and the piper needs to be paid.

    Governments around the world shut down economies and fed cash into their systems hoping people would put food on the table and pay their rents.

    But, we increased disposable income and suspended obligations. Canada and many other countries are going to experience whiplash in my view

  • Rob 4 years ago

    The empirical information I see online is condo listings on steadily increasing daily with no price capitulation. Endless condo assignments on KIJIJI ( not sure if this is common with pre-construction condos ) do all pre-construction condos get snapped up and flipped? SFH supply looks tight on ( lot’s of $1 000 000 + shacks )
    Not sure why someone one wants to be making payments to the bank for the next 20 years to live there 😂 . I’ve seen some SFH’s for rent on Craigslist for $1000. May you live in interesting times ☮️

    • alvi 4 years ago

      Great news SFH for $1,000 per month? So affordability crisis is over now we can show that we really care and rightsizie government so we don;t continue borrowing are future away

      • alvi 4 years ago

        “are future away” should be” our future away”. Is there anyway we can edit our posts without the need of an additional comment? Anyone?

  • Joseph 4 years ago

    Nothing would happen as the government will be spreading money around.

  • Rick Hyne 4 years ago

    I bet many will find that deferring their mortgage when they had other options will come back and bite them.

    Interest still accrues. That interest is added to the principle and when the mortgage is renewed that extra $6,000.00 will increase the monthly payment.

Comments are closed.