Mortgage deferrals will soon end for many Canadians. So what? – National


Six-month mortgage deferrals for borrowers grappling with the financial impact of the novel coronavirus pandemic will be largely completed in the fall. One of the questions hanging over the future of Canada’s economic recovery is how many of those deferrals will turn into defaults.About 2.6 million Canadians, or just over 9% of credit consumers, have at least one active deferral, according to a recent TransUnion Canada survey. Of those deferrals, 28% are mortgages, the report also says.

By the end of June, some 760,000 Canadians, or about 16 percent of mortgage holders, had taken advantage of mortgage deferral options put in place by banks since mid-March.

Mortgage deferral “cliff” is coming

Mortgage deferral ‘cliff’ arrives

Policymakers, investors, and economists will be watching closely how many of these homeowners will be able to pay their bills when the payment holiday ends.

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“The numbers look better than they are in economics and also corporate earnings because there is so much government intervention,” says Gregory Taylor, chief investment officer at Purpose Investments.

“It will be interesting to see how things really go when you remove the training wheels,” he adds.

These training cogs include federal income support programs like the Canadian Emergency Response Benefit (CERB) and payment deferrals, which, although offered by private financial institutions, have been aided by various measures. crisis policy.

READ MORE: What do CMHC’s new rules mean for homebuyers?

When it comes to the end of the mortgage grace period, there is no consensus on what the future holds.

In May, Evan Siddall, president and CEO of the Canada Mortgage and Housing Corporation (CMHC), spoke of a mortgage deferral “cliff” in the fall, when some unemployed homeowners are expected. start making payments again.

“Up to a fifth of all mortgages could be in default if our economy has not recovered sufficiently,” Siddall warned.

Mortgage expert Robert McLister, meanwhile, sees more of a “deferral gap”.

There is “no doubt” that mortgage defaults will surge in the last three months of 2020, says McLister, mortgage editor at and founder of rate comparison site

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But many borrowers appear to have taken the payment vacation not out of financial necessity, but to build up an emergency cash reserve, McLister says citing conversations with lenders. Others will be able to use their lines of credit to continue making their mortgage payments, he adds.

Open house: mortgage deferrals

Open house: mortgage deferrals

It helps that house prices have generally held up or increased in much of Canada since government restrictions on COVID-19 began to loosen. According to the Canadian Real Estate Association, average home prices rose 14.3% in July from the same month last year.

The strength of the real estate market also means that homeowners who cannot keep up with payments after the deferral period ends will have an easier time getting their properties to market, McLister says.

“There is definitely going to be an increase in the supply (of housing),” he says.

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But while the rebound in the housing market bodes well for Canada’s chances of avoiding a massive spike in defaults, record household debt is a significant vulnerability.

“The possibility of a triggering event occurring when household debt is high has long been cited as the greatest risk facing the Canadian financial system,” notes a recent Bank of Canada analysis.

The study, which dates back to June, found that one in five households has enough financial backing to make just two months of mortgage payments and about a third can make up to four months of payments. In other words, without a steady income, many homeowners wouldn’t last long.

READ MORE: Canadians who have exhausted EI are included in post-CERB scheme

Mortgage deferrals and programs like CERB help keep homeowners financially strained as the labor market recovers from the impact of foreclosure, the researchers note.

It is not known how long borrowers will be able to count on these two buoys.

On August 20, the Trudeau government announced a $ 37 billion package to extend the CERB for an additional four weeks and strengthen support for workers affected by COVID-19 once emergency benefits run out. The new measures include significant changes to employment insurance and the creation of three new benefit programs.

However, there is some uncertainty surrounding the future of the new measures, with Prime Minister Justin Trudeau proroguing Parliament until September 23 following Bill Morneau’s resignation from his post as federal finance minister and the WE Charity scandal.

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READ MORE: Liberals unveil $ 37 billion for CERB transition to new benefits and EI changes

Sources who have been made aware of the government’s plan say the new income support will be created through regulations rather than laws, The Canadian Press reported.

When it comes to mortgage deferrals, some lenders have said they will work on a case-by-case basis with borrowers who cannot resume their regular payments.

The other key variable to watch is how quickly the job market will heal, Bank of Canada researchers note.

Since May, the economy has recovered about 1.7 million of the roughly three million jobs it lost in March and April due to mandatory closings of businesses and schools.

But after a strong partial rebound, the pace of the recovery appears to have slowed down a bit, Taylor says. And there could be setbacks, he warns, such as the arrival of a second wave of COVID-19 cases.

There’s also a risk that as businesses stick to the work-from-home model longer, “they probably realize that they don’t need everyone to come back,” Taylor says.

“Fall is going to be really interesting.”

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