What does the End of Canada’s Mortgage Deferral Programs Mean for the Real Estate Market?
In March and April of this year, many of Canada’s largest banks offered relief to mortgage borrowers who were experiencing financial strain as a result of the pandemic lockdown measures. The mortgage deferral programs allowed borrowers to suspend up to six months of payments without penalty, giving the economy time to recover and getting people back to work before requiring them to go back into repayment.
With the expiration of these programs on Septebmer 30 and the economy only starting to get back on track, what is the outlook for the national real estate market? Just like everything else affected by the coronavirus, there are differing opinions.
The impact of mortgage deferrals on Canadians
As of October 2, 2020, the Canadian Bankers Association reports that “Canada’s banks have helped more than 778,000 homeowners with mortgage flexibility,”1 which could encompass mortgage deferrals or skipped payments. News from the CBC helps put this into context: they cite data published by the Canada Mortgage and Housing Corporation (CMHC) to conclude that about one out of every six mortgage holders has deferred at least one payment since the program began.2
However, not all homeowners who opted to defer mortgage payments did so out of immediate need. As Global News reports, “many borrowers appear to have taken advantage of payment vacations not out of financial necessity but to build an emergency cash buffer.”3
The Financial Post supports this idea when it notes that “the majority of those who opted for mortgage deferral as a precaution [are] expected to exit the program without going into arrears.”4 If some borrowers deferred payments without pressing financial need, we might surmise that the number of Canadians who may be in danger of defaulting on payments is fewer than one in six.
How might mortgage deferrals affect real estate?
It was only mid-May and still the early days of the pandemic when Evan Siddall, president and chief executive officer of the CMHC, warned the Standing Committee on Finance of a “growing debt ‘deferral cliff’ that looms in the fall, when some unemployed people will need to start paying their mortgages again.”5 At that time, the CMHC was predicting that as many as one in five mortgages could be in arrears by now.
Nevertheless, his concern was well-founded: if a struggling economy meant borrowers were unable to resume payments – which might now be higher because of interest that accrued during the six-month deferral period – we could see homeowners losing their homes, being forced to sell, or choosing to sell their investment properties. This, of course, would lead to a surge of inventory on the market, which would help to satiate buyer demand and drag home prices down, but which could hurt buyer’s investments if house prices fall too far.
Thankfully, home prices in many of Canada’s major markets have been generally steady or have increased since the lockdown measures were loosened. In August, the Canadian Real Estate Association reported that the national average home price was up a record-breaking 18.5% from the same month last year.6
According to Robert McLister, mortgage editor at Rates.ca, “[t]he strong real estate market […] means homeowners who can’t keep up with payments after the end of the deferral period will have an easier time putting their properties on the market.”7 While selling to avoid foreclosure certainly isn’t an ideal outcome, the current strength of the overall market suggests that prices may not drop as detrimentally as Siddall feared they would. Instead, what we may see is some much-needed balance returning to some of the major markets where inventory has reached record lows.
Big banks have confidence in Canadian borrowers
Mortgage Broker News reports that in early September, some of Canada’s largest banks “expressed confidence that most borrowers who took on deferrals for their mortgages will be able to resume payments soon.”8
Bank of Montreal Chief Financial Officer Thomas Flynn said most of the institution’s consumer borrowers who had taken advantage of the deferral program had already resumed payments, and a “radically different outcome” isn’t expected for those still in deferral status. Similarly, Rod Bolger, CFO at Royal Bank of Canada, stated, “[w]e’re not looking at seeing a big spike in foreclosures. We expect that these mortgages, as they come off the deferral programs, remain the homes of our clients.”9
Naturally, the verity of these statements will depend on economic recovery since homeowners will need jobs in order to resume mortgage payments. Reports show that around 1.7 million jobs have been recovered of the three million that were lost during spring lockdowns, indicating that that the economy is on a slow rebound.10 Yet, The Financial Post notes that “[a]s the economic engine restarts, most full-time workers, who are more likely to be homeowners, are expected to be able to meet their financial obligations, including meeting housing and shelter costs.”11 Brian Porter, CEO at Scotiabank, takes a similar stance, saying there are “signs for optimism as household spending continues to return to more normal levels and economic output continues to regain lost ground.”12
What Canadians think
Though it will take some time to know precisely how Canadian homeowners fare with mortgage deferrals coming to an end, consumers themselves are showing a good deal of optimism. In the Consumer Debt Index published in July, 61% of the 2,000 Canadians polled expressed feeling “more confident than ever about being able to cover their living expenses for the next 12 months without going further into debt,” and 27% “perceive their debt situation to be better now than it was a year ago.”13
While the Bank of Canada’s research from June finds that without financial assistance of some kind, “one in five households has enough financial buffers [to make] just two months of mortgage payments,”14 there may still be good reason to feel confident. The Financial Post reports that “federal institutions are taking steps to allow deferrals to last until December,”15 and the Canadian Bankers Association asserts that “banks in Canada will continue to stand by their customers,” bringing them “tailored solutions to help foster a strong recovery.”16 With such support, there is hope that Canadians will continue to manage their loans and stay in their homes.
If you need to sell or buy a home during these uncertain times, a Purplebricks REALTOR® can help you navigate the market.
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1. Canadian Bankers Association: Canadian Banks are Standing by Canadians
2. CBC News: Canadians have deferred $1B a month worth of mortgage payments since pandemic began
3. Globalnews.ca: Mortgage deferrals will soon end for many Canadians. Then what?
4. Financialpost.com: Want to dodge the debt cliff? Extend mortgage deferrals until the job market recovers
5. CMHC: Supporting Financial Stability During COVID-19 Pandemic
6. CREA: Housing Market Stats, August 2020
7. Globalnews.ca: Mortgage deferrals will soon end for many Canadians. Then what?
8. Mortgagebrokernews.ca: Major Banks Anticipating Resumption of Most Mortgage Payments
9. Mortgagebrokernews.ca: Major Banks Anticipating Resumption of Most Mortgage Payments
10. Globalnews.ca: Mortgage deferrals will soon end for many Canadians. Then what?
11. Financialpost.com: Want to dodge the debt cliff? Extend mortgage deferrals until the job market recovers
12. Mortgagebrokernews.ca: Major Banks Anticipating Resumption of Most Mortgage Payments
13. MNP: Consumer Debt Index
14. Globalnews.ca: Mortgage deferrals will soon end for many Canadians. Then what?
15. Financialpost.com: Want to dodge the debt cliff? Extend mortgage deferrals until the job market recovers
16. Canadian Bankers Association: Canadian Banks are Standing by Canadians