While homeowners may be breathing a sigh of relief that interest rates are headed downward, a Canada Mortgage and Housing Corp. analysis said increases in mortgage arrears over the next six to 12 months are likely, especially in Toronto and Vancouver.
Using data obtained from Equifax, the Canada Mortgage and Housing Corporation (CMHC) assessed the best predictors of mortgage arrears in nine major Canadian markets.
Arrears is a legal term used to describe when someone has not submitted a due payment. If one or more mortgage payments have been missed by their contractual obligation, the payee's account is in arrears.
The study released Thursday found when sales activity slows — signalling a "cooling" market — homeowners struggling with mortgage payments have fewer options to sell and avoid falling into arrears.
CMHC also found arrears in non-mortgage credit products, such as credit cards and auto loans, are an early predictor of mortgage arrears.
The high number of listings relative to sales in Toronto and Vancouver is likely limiting exit strategies for current homeowners seeking to sell, the study reported.
"This, combined with increasing non-mortgage arrears, creates conditions likely to result in increasing mortgage arrears in the future," the CMHC said. "This could potentially be avoided if mortgage rates decrease more than expected or if market conditions ... revert into sellers' market territory, where there are significantly more buyers than sellers."
Even though rates recently started decreasing, Canada is still in restrictive monetary territory and it will take several months before the full extent of easing is felt across Canadian housing markets.
Meanwhile, many households will continue to experience the burden of the "mortgage renewal shock" along with the effects of inflation, which have eroded discretionary income and made it more challenging to cope with rising mortgage costs, the CMHC said.
The corporation's most recent residential mortgage industry report revealed just over one million mortgage consumers face a renewal in 2025 at significantly higher interest rates than they are currently paying.
At the same time, the labour market is easing and unemployment is rising nationally.
"This shift could increase financial pressures for many Canadian households, potentially pushing some into arrears as they struggle to make ends meet," the CMHC said.
