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Mortgage borrowers adapt to higher interest rates

May 25, 2023

Results at-a-glance

Mortgage consumers are changing their borrowing habits to adapt to higher interest rates.
Increasing consumer debt continues to be a systemic risk. Some households are struggling to repay their debts.
Alternative lenders are lending more conservatively due to limited funding.
A larger share of alternative loan mortgage borrowers are renewing their loans in this space because it’s more difficult to qualify for a conventional loan.

Our Residential Mortgage Industry report provides an economic analysis of the residential mortgage industry in Canada. Our team of researchers review the latest data on insured and uninsured mortgages from all lender types. They then identify and analyze emerging trends in the Canadian residential mortgage industry.

Download the report (PDF)

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(Visual: Government of Canada logo, and CMHC logo fade in together. A series of images featuring housing across Canada.)

00:00:02

CHRISTELLE: The Residential Mortgage Industry Report provides analysis of the mortgage industry in Canada. It examines the latest available data on insured and uninsured mortgages of all lender types and provides details on the latest emerging trends in the industry.

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(Visual: Two people are shown in conversation. They sit across from one another at a boardroom table. The two individuals are Christelle Legault, Communications & Marketing, CMHC, and Tania Bourassa-Ochoa, Housing Researcher, CMHC.)

00:00:16

CHRISTELLE: Hi, I’m Christelle Legault and today, I’m joined by Tania Bourassa-Ochoa, housing research expert and lead researcher of this report. Welcome Tania.

00:00:24

TANIA: Thank you Christelle, it’s great to be here.

00:00:26

CHRISTELLE: Good. So, we know high inflation rates and high interest rates are affecting Canadians’ debt levels and we’ll get to that in a minute, but could you walk us through what the latest data is telling us about the mortgage industry?

00:00:39

TANIA: Yes, absolutely. So, what we see with the latest data from 2022 is that with all of the economic uncertainty, with the cost of credit being much higher than what it used to be and also consumer confidence that has decreased, well we’re seeing borrowers’ behaviors changing and they’re really reacting to the rise in interest rates.

00:01:03

CHRISTELLE: So you talk about borrowers changing behavior and it makes a lot of sense as to why they would, but what exactly is that behavior change that we’re seeing?

00:01:11

TANIA: So, first of all, we’re seeing that they’re opting for shorter term fixed term mortgages. Typically, we would see them choose longer term so it’s giving us an indication that they’re anticipating interest rates going down down the road. We’re also seeing refinances that have dropped significantly by 32% and also interestingly enough, they’re choosing longer amortization periods so what that means is that they will be paying their mortgages on a longer period of time but in the short term, mortgage payments are smaller. And also in the context where it’s actually harder to get a loan with a conventional lender, a lot of the borrowers are going into the alternative lending segment.

00:01:58

CHRISTELLE: Ok, so I’d like to touch on that alternative lending segment which is something that we’re seeing. What exactly is happening in that space?

00:02:06

TANIA: So first of all, I think it’s important just to put in context who are these alternative lenders so these are unregulated lenders in terms of their mortgage activities. They will offer short term 1 to 2 years loans and with significantly higher interest rates, but they would typically loan to people that have bruised credit or no credit history like newcomers for example or even self-employed. But now in the context where interest rates are significantly higher, well a larger portion of borrowers are demanding for loans in that space. It’s important to note that there is a limited amount of capital though in that space so it doesn’t mean that everybody that applies for a loan there will get it, but however, we’ve seen that mortgages the market share of alternative lenders has increased to over 10% in 2022.

00:03:07

CHRISTELLE: That’s an interesting increase and so with these alternative loans or these alternative borrowers and these loans at a higher interest rate, is there a concern that this could be impacting the economy especially in those bigger cities like Toronto and Vancouver?

00:03:23

TANIA: So actually when we’re looking at the industry as a whole, we’re seeing that they have a relatively low risk profile so we’re seeing foreclosures are still low, we’re seeing delinquency rates which are also still low. Even loan-to-value ratios which are approximately around 75% is still a relatively low number so that means that if borrowers would not be able to make their payments or if property values would go down significantly, they would be able to cover that. However, there are an increasing number of borrowers that are forced to renew their mortgages in that space so that means that with higher interest rates and maintaining these higher interest rate mortgages for a longer period of time, well affordability could remain an issue for these borrowers that many times are in more precarious financial situations.

00:04:21

CHRISTELLE: Ok and speaking of affordability and shifting a little bit to you know, conventional mortgages, we know from latest Stats Can data that 1 in every 3 Canadians has a variable rate mortgage which is impacting their ability to make their payments, increasing their payments and in some cases even doubling what they were paying this time last year and we know from our latest mortgage consumer survey that 74% of those consumers are saying that they’ve been impacted by the recent rate increase or will be soon impacted. And we also have an article from our deputy chief economist who talks about Canadian debt levels and that 75% of that debt is mortgage debt. Is there a cause for concern that people may no longer be able to make those payments?

00:05:09

TANIA: So that’s a great question. I have to start by stating the fact that household debt does remain an important source of vulnerability for financial stability in Canada. So you mentioned that homeowner and household debt is still at record levels as we speak so with these higher interest rates with higher costs of life as well, so we did dig up into that question and so we’re seeing that delinquency rates which are mortgages that haven’t received a payment for the last 90 days, they have increased slightly but still at very low levels when you compare it to the past 30 years for example.

However, delinquent mortgages are what we call a lagged indicator so what we mean by that is that if a household would be in a precarious financial situation or maybe financially strained, we wouldn’t see it as quickly in terms of mortgage delinquencies, but we would see it on other credit products. So now when we’re looking at credit cards, auto loans or even lines of credit, we are seeing an increase in delinquencies for these products and it is telling us that some consumers are maybe having a harder time to reimburse their debt.

00:06:33

CHRISTELLE: Ok and one last question is you know, this is a fairly new report to CMHC and you spearheaded this work over the last few years. Can you explain to us how this report came to be?

00:06:46

TANIA: Yeah, absolutely. So our journey actually began in 2014 so at that time, housing markets there was a lot of uncertainty in the housing markets and there was a rather clear consensus that in the industry but also in the economic community, that there was a large gap around data and knowledge in housing finance so CMHC led a whole bunch of initiatives to collect data, make data more publicly available so the Residential Mortgage Industry Report that we have today is basically the result of all of these initiatives and it’s really allowing us to tell the story of the mortgage markets allowing businesses to make more informed risk based decisions, but also policymakers to make more informed policy decisions. So I think that by making markets more transparent at the end of the day, we’re I’d like to think contributing to financial stability which is really the foundation for housing affordability in Canada.

00:07:57

CHRISTELLE: Absolutely and great work, Tania. Thank you very much for joining us today and walking us through this video and we hope to have you back sometime real soon.

00:08:04

TANIA: Thank you so much.

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00:08:06

CHRISTELLE: And thank you to our viewers today. For the full report, please check the description below and as always, we want to hear from you. Feel free to leave a comment, feedback, or suggestions on what you’d like to hear as discussed next. Subscribe to our YouTube channel to stay on top of the latest conversations with our housing experts. Thank you.

(Text on screen: Hit subscribe and stay tuned for future conversations on Canada’s housing market!)

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(Visual: Government of Canada logo, and CMHC logo fade in together. Logos fade to white.)

Borrowing habits are shifting in Canada

High inflation and rising interest rates in Canada are causing mortgage borrowers to shift their behaviours. Consumers are looking for ways to reduce their monthly debt servicing costs. To do this, borrowers are choosing shorter-term fixed rate mortgages because they expect that the policy interest rate will decrease from its 15-year high in the next few years. They’re also choosing shorter-term fixed rate mortgages due to the minimal rate differences between the different agreement lengths. While this gives them more flexibility when repaying their loan, it also means they will pay off their loan over a longer period.

Early signs that some mortgage consumers are under financial strain

While consumers are adapting to higher interest rates, increasing consumer debt continues to be a systemic risk. Our researchers also indicate that some households are struggling to repay their debts. They also found that refinancing dropped by 32%.

"With record levels of mortgage debt and the higher cost of living, questions are arising around the ability of Canadian households to make their monthly debt payments.”
— Tania Bourassa-Ochoa, Senior Specialist of Housing Research, CMHC

Alternative lenders are seeing more borrowers renewing high-interest mortgages. This means that affordability could become an issue for borrowers that find themselves in more precarious financial situations.

Rise of alternative lenders in the Canadian mortgage space

Alternative lenders are gaining a larger share of the market, suggesting Canadians are looking for options when securing a loan. Alternative lenders extended over 10% of new mortgages according to our latest data (up to December 2022).

Despite growing concerns about homeowners’ ability to make mortgage payments, the number of mortgages in arrears remains low.

While our analysis points to the non-bank mortgage market becoming an increasingly significant part of the housing finance system, it’s important to note that alternative lenders represent a small share of total mortgages in Canada.

By the numbers

Slower mortgage growth — As of January 2023, residential mortgage debt was $2.08 trillion, an increase of 6% compared to January 2022. However, the rate of growth has slowed compared to recent years.
Mortgage Investment Entities market share has risen — Extended mortgages provided by Mortgage Investment Entities have risen from 3.7% to 10% market share in the first half of the year.
Less fixed rate 5-year mortgages, more short-term fixed rate mortgages — Less than 15% of new mortgages are fixed-rate 5-year mortgages, while variable rate mortgages have dropped to less than 20% of new mortgages.
Alternative lenders have an increasing share of the market — Alternative lenders have taken an increasingly larger share of the market — Their share of extended mortgages has risen to over 10% of the market from just 3.7% in the first half of the year.

Download the report (PDF)

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Date Published: May 25, 2023