Homeowners turn to savings as financial pressure mounts

May 29, 2024

Tania Bourassa-Ochoa — Deputy Chief Economist

Several leading indicators suggest an increasing number of mortgage consumers are experiencing significant financial pressure.
The financial reserves accumulated during the pandemic have been exhausted. In fact, low to mid-income households are breaking into their savings to make ends meet.
We expect mortgages in arrears to reach pre-pandemic levels (0.25%) by the end of the year. More favourable employment in 2025 and tight housing market conditions should, however, limit the increase.

From a financial stability standpoint, the ability of homeowners to make their mortgage debt payments on time is crucial. This is especially true in the Canadian context given that over 75% of household debt is attributed to mortgages.

With higher financing interest rates, elevated housing costs and rising costs of living, Canadians are dealing with substantial strain on their monthly budgets. These financial pressures, coupled with a slight increase in unemployment, have recently translated into increases in mortgage arrears (the share of mortgages where payments have been overdue for more than 90 days).

While arrears remain close to historic lows (Canadian Bankers Association (CBA) mortgage arrears are at 0.19% as of February 2024 (PDF) ), other leading indicators suggest the financial well-being of Canadian households is under greater stress.

Changing credit behaviours, negative savings rates and rising delinquencies on credit card, auto loans and line of credit payments are among the current indicators that Canadian mortgage holders may not be as financially sound after all (Table 1).

In fact, mortgage consumer confidence has also been negatively affected; the 2024 Mortgage Consumer Survey reveals that close to a quarter of respondents are worried about their ability to make their mortgage payments. The aggregation of these indicators coupled with a softer labour market in 2024 suggests that mortgage arrears will reach pre-pandemic levels by the end of the year.

As household debt levels are at an all-time high and many are facing financial difficulties, the financial vulnerability of household debt has become one of our main areas of concern.

Policymakers and the financial sector are closely monitoring the risks to the overall economy and financial system stability, given that an unexpected shock could tip a greater number of homeowners into default.

Table 1. Indicators of financial stress amongst mortgage consumers
Indicators of mortgage consumer financial pressure	Stages of financial pressure	Indicator value (% Year-over-Year)
Savings rate	Early	6.1% - 2023 Q4 (Dis-savings amongst low to mid-income)
Mortgage consumer confidence (Share of respondents worried about a risk of default)	Early	50% in 2024 (+X%)
Financial and credit behaviour changes (Total debt per consumer index \| Low-Low)	Intermediate	114 (2023 Q4) (+12)
Consumer debt product arrears (excluding mortgages and HELOCs)	Intermediate	Credit cards: 0.63% (+12 bps) Auto loans: 0.34% (+3bps) Lines of credit: 0.29% (+9bps)
Mortgage arrears (90 days + overdue)	Advanced	0.19% (+5bsp)

Join Tania Bourassa-Ochoa for an in-depth discussion of the reports findings. Watch the video

Mortgage arrears are only part of the picture: households have been dealing with financial difficulties for some time

Typically, the share of mortgages in arrears is seen as the main indicator of financial stress for homeowners. However, this measure only gives us a glimpse of the full picture because the share of mortgages in arrears is a lagged indicator.

In other words, if a household has missed its mortgage payment for over 3 months, chances are it has been experiencing periods of financial stress for a longer time. This is because Canadian homeowners often prioritize mortgage payments over other debt payments and non-essential expenses.

Therefore, in the early stages of financial stress, we tend to see a significant reduction of savings as well as reduced consumption. Under greater financial pressure, households may tap into savings or borrow more.

If their financial situation persists or worsens, consumers may choose to sell some of their assets to keep up with their mortgage payments. With prolonged financial stress, homeowners could exhaust their financial resources, leading to missed mortgage payments and mortgage arrears, putting them at high risk of default.

In the previous quarters, we’ve seen a gradual increase in mortgage arrears from historically low levels, with over 12,600 mortgages now having missed payments for over 90 days.

Figure 1. Sharp increases in delinquency rates for other credit products are a leading indicator for mortgages in arrears
Date	Credit cards	Auto Loans	Lines of Credit	Mortgages
2008 Q1	1.50	0.93	0.72	0.27
2008 Q4	1.48	1.19	0.77	0.33
2009 Q3	1.85	1.55	1.00	0.43
2010 Q2	1.86	1.56	1.08	0.42
2011 Q1	1.72	1.20	0.84	0.45
2011 Q4	1.71	1.19	0.78	0.38
2012 Q3	1.68	1.24	0.80	0.33
2013 Q2	1.60	1.34	0.77	0.31
2014 Q1	1.58	1.41	0.72	0.31
2014 Q4	1.51	1.43	0.64	0.29
2015 Q3	1.43	1.54	0.63	0.27
2016 Q2	1.57	1.86	0.66	0.28
2017 Q1	1.64	1.89	0.65	0.27
2017 Q4	1.51	1.73	0.61	0.24
2018 Q3	1.49	1.66	0.61	0.24
2019 Q2	1.59	1.88	0.64	0.24
2020 Q1	1.70	2.14	0.65	0.24
2020 Q4	1.18	1.70	0.55	0.23
2021 Q3	0.99	1.66	0.44	0.18
2022 Q2	1.20	1.88	0.41	0.14
2023 Q1	1.44	2.11	0.52	0.15
2023 Q4	1.56	2.09	0.72	0.18

Several indicators suggest mortgage arrears will continue upward trend

The financial stress faced by households can be observed by looking at other more timely indicators, suggesting the financial burden experienced by mortgage holders is greater than at first glance:

The financial buffer accumulated during the pandemic is exhausted: Recent credit data shows mortgage borrowers who have a higher probability of filing for bankruptcy¹ have on average increased their amount of debt. Additionally, the Spring 2024 edition of the Residential Mortgage Industry Report shows the number of borrowers with a high probability of bankruptcy has also increased.
Growing use of debt to make other debt payments: The increasing share of borrowers recording a low credit score and higher probability of bankruptcy may also suggest that borrowers are either requesting more debt and/or increasingly using up their revolving credit (such as a credit cards or line of credits) to make their monthly debt payments (Figure 1).
Lower- to mid-income households are using up their savings to make ends meet: In the last quarter of 2023, the average household savings rate was stable at 6.2% (it peaked at 11% during the pandemic). However, the distribution of households based on income levels shows a quite different trend. Households with higher income recorded net savings of 12.6%. On the other hand, lower-income households are dipping into their savings every month. The increases in cost, mostly related to housing and other essential goods and services, have outpaced the income gains recorded for low-income families.²
Increasing delinquency rates among other credit products: Among mortgage holders, a higher number of payments are overdue for auto loans, credit cards, lines of credit and, more recently, home equity lines of credit (HELOCs). This means a growing share of credit consumers are struggling with debt payments. Increases in mortgage arrears have been preceded by delinquencies in other credit products as homeowners usually prioritize their mortgage payments.
More than a quarter of mortgage owner survey respondents are concerned about their ability to make their mortgage payments: As a result, a lot of borrowers are taking steps to cut their spending, establish a new budget or find alternative ways to increase their income. Despite the increasing number of consumers experiencing the heavy pressure of their debt, 14% struggled to cover their mortgage payments.

These notable changes in financial behaviour, recent dissaving trends and low mortgage consumer sentiment all suggest more Canadians are living paycheck-to-paycheck and trying numerous creative ways to stay afloat.

Additionally, close to half of borrowers have yet to renew their mortgage, this year and next, at a higher rate. This unprecedented context is making mortgage holders even more fragile to changing employment conditions or a major life event that would negatively impact their household income.

Figure 2. Mortgages arrears have historically been driven by unemployment
Date	CBA arrear rate	Unemplyment rate
1990-01	0.18%	7.9
1991-03	0.43%	10.5
1992-05	0.58%	10.9
1993-07	0.47%	11.6
1994-09	0.49%	10.1
1995-11	0.57%	9.2
1997-01	0.65%	9.5
1998-03	0.49%	8.4
1999-05	0.50%	7.9
2000-07	0.40%	6.8
2001-09	0.43%	7.2
2002-11	0.36%	7.5
2004-01	0.34%	7.3
2005-03	0.27%	6.9
2006-05	0.24%	6.2
2007-07	0.25%	6
2008-09	0.29%	6.3
2009-11	0.44%	8.6
2011-01	0.45%	7.8
2012-03	0.37%	7.3
2013-05	0.31%	7
2014-07	0.28%	7.1
2015-09	0.27%	7.1
2016-11	0.27%	6.8
2018-01	0.24%	5.9
2019-03	0.24%	5.9
2020-05	0.26%	14.1
2021-07	0.18%	7.4
2022-09	0.14%	5.1
2023-11	0.17%	5.8

Mortgage arrears expected to rise back to pre-pandemic levels by the end of 2024; the rise will be limited by more favourable labour market conditions in 2025

Historically, unemployment has been the main driver behind rising mortgage arrears (Figure 2). Recently, the labour market in Canada has shown signs of softening, with unemployment rates increasing to 6.1% in April (compared to 5.1% a year earlier).

This uptick in job losses combined with more financial difficulties has translated into a larger number of delinquent homeowners. This highlights the direct link between employment and housing for leveraged homeowners, especially in a context of high debt levels.

With unemployment forecast to continue rising slightly in 2024 coupled with heavy financial pressure weighing on homeowners, we can expect to see mortgage arrears increase to pre-pandemic levels (0.25%) by the end of this year. The extent to which this will occur will be limited by an expected tightening of labour market conditions as of next year.

In fact, as we expect interest rates to come back down, 2025 should be characterized by a boost in economic activity.

This economic momentum will help reduce potential job losses, which could otherwise have led to more mortgage arrears.

The liquidity of the housing market could also allow struggling families to sell their property without defaulting on their mortgage loan

In our latest housing forecast, we expect the decline in interest rates and the strong growth in population will contribute to tightening conditions in the resale market. This will contribute to sustaining house price increases and limit the amount of time it takes to sell a property.

For households that are struggling to make ends meet and choose to sell their home, the liquidity of the housing market could provide a financially viable solution to avoid defaulting on their mortgage loan. As a result, the liquidity of housing markets in Canada may limit the rise in mortgages in arrears.

There may be solutions available for households that are struggling to reimburse debt and make ends meet

As a growing number of families are facing financial difficulties, we cannot overlook an array of negative implications on households, including higher levels of emotional pressure.

If you are struggling with debt or finding it difficult to make ends meet, it may be worthwhile to seek professional help from a credit counsellor who can help to identify a range of suitable, personalized solutions.

To learn more about your rights as a consumer of financial services the Financial Consumer Agency of Canada provides comprehensive information to help you make more informed and effective decisions.

Footnotes

Transcript

(Music fades in.)

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

(Visual: Two people are shown in conversation. They sit across from one another at a boardroom table. The two individuals are Joelle Hamilton, Communications & Marketing, CMHC, and Economist Tania Bourassa-Ochoa, Deputy Chief Economist CMHC.)