Canada’s big banks are seeing a sharp erosion in mortgage credit quality. Canadian Bankers Association (CBA) data shows mortgage arrears climbed sharply in October. The rate now sits at a five-year high, but the stress may be even worse than it appears. CBA member banks are holding fewer total mortgages, potentially signaling risk mitigation.
Canadian Mortgage Arrears A Hit 5-Year High
Canadian residential mortgages in arrears at least 90 days at CBA member banks.
Source: CBA; Better Dwelling.
Canada’s largest banks continue to see borrowers fall behind on mortgage payments. The arrears rate at CBA member banks climbed 1 basis point (bp) to 0.25% in October, up 4 bps from last year. The rate is now the highest since September 2020, and now sits above pre-pandemic levels. It’s also worth noting that most of the CBA’s largest members reported higher rates in their quarterly earnings.
In our experience, it’s not easy to appreciate how large (or small) a number is without much context. The rate works out to 12,200 mortgages in arrears for the month, 19.0% higher than last year. While the rate seems small in the grand scheme of things, the pace of credit erosion is concerning. The rate isn’t just bigger than last year, it has also surged nearly 20%.
Canadian Banks Holding Fewer Mortgages On Their Books
Total Canadian residential mortgages held by CBA member banks.
Source: CBA; Better Dwelling.
Canada’s largest banks are also hanging onto fewer mortgages, amplifying pressure. The CBA reported 4.96 million mortgages held in October, down 0.91% from last year. It’s rare for the total volume to shrink, but annual growth has been negative since April 2023. This marks the longest contraction on record, meaning every delinquency matters more. It raises questions about why the contraction is happening, despite steady mortgage growth.
The decline in total mortgages is a sign the rising arrears isn’t the whole story. While details are scarce (likely by design), the bulk of the decline is due to migration to non-bank lenders. There are a few reasons to use non-bank lenders—monoline lenders tend to have better rates for high quality borrowers. However, borrowers can also be pushed to more expensive non-bank lenders as a part of risk mitigation.
Banks often sell non-performing loans (NPLs) to more risk tolerant B-lenders. They also conduct non-renewal purges of riskier borrowers, sending the problem downstream. In both cases, these borrowers often end up at private lenders that represent up to 15% of the market. These lenders also often carry much higher delinquency rates, sitting as high as 5%. This is a route that may be popular in coming months, considering the emerging investor cash flow issue.
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