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Will COVID-19 Impact Mortgage Defaults?

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May 27, 2020

Since the outbreak of the COVID-19 pandemic, Canada’s mortgage and real estate industries have become volatile. In the short term, the market will suffer, while long-term recovery will be linked to whether the country can avoid widespread mortgage defaults.  

Canadian banks have risen to the challenges presented by COVID-19. Across the board, lenders offer relief to homeowners in the form of skip-a-payment measures and deferrals.  

These unprecedented benefits are designed to keep Canadians in their homes as they face financial struggles through the coronavirus crisis. However, are they enough to stop a surge in mortgage defaults? 

There’s a lot to lose, for homeowners and lenders. Mortgage defaults have broad consequences, including crashing property values and hurting the economy. For customers, the impact of a mortgage default is devastating, preventing refinancing and hurting their ability to find a new home.  

There is a direct line between unemployment and mortgage payment issues. In fact, being unemployed has the greatest long-term impact on home values. This is a problem in a COVID-19 world where millions of people are finding their job status change.  

According to Statistics Canada, 5.5 million Canadians are either out of work or facing “substantially reduced hours”. The race is on to accurately forecast the impact of the crisis on the mortgage industry. Economists are estimating the national mortgage arrears rate will increase from its current historical low of 0.25% to 0.38%, although that could be a generous prediction.  

If we look at historic events, the good news is Canadians have proved to be excellent at keeping up with their mortgage payments, even during the worst of times. For example, during the 2007-2008 financial crisis, residential arrears reached a high of just 0.45%. Considering the devastating impact of that economic crisis, the increase in arrears was viewed as a small win for the financial sector.  

Despite the concerns about the impact COVID-19 could have on the Canadian mortgage rates, many analysts believe defaults will not reach the levels of the 2008 financial crisis. However, these estimates are based solely on blind guessing since the COVID-19 pandemic is a fluid situation that alters economic prospects daily.  

Canada’s banks acted quickly enough to parachute many homeowners if the worst happened. The introduction of deferral and late payment measures means Canada’s housing market will certainly not face a crash like the U.S. mortgage crisis of 2008. But there are no guarantees. 

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