This week, CMHC projected that mortgage arrears could surge to record highs.
But, what exactly are mortgage arrears, and how are they different from mortgage defaults or foreclosures?
We’ve put together an explainer on mortgage arrears, and what folks going through tough times can do to avoid losing their home.
What are mortgage arrears?
“Arrears” is a financial term most commonly used to describe a payment obligation that hasn’t been received by its due date. In other words, a missed/late payment.
When one or more regularly scheduled payments have not been made, whether they be mortgage payments, rent payments, utility bills, or any other kind of credit account, they are in arrears.
In mortgage-land, another word for arrears are mortgage delinquencies.
What’s the Difference Between Delinquency/Arrears and Default?
A default occurs when you don’t honour the terms of your mortgage agreement.
By definition, missing a payment (i.e., being in arrears) is a default.
What is a Home Foreclosure/Power of Sale?
In certain provinces, like Ontario, New Brunswick, Newfoundland & Labrador and Prince Edward Island, when a borrower falls behind on their mortgage payments, the lender must provide the borrower with notice and at least 35-days to get their payments back on track.
Failing that, the lender can move forward with the process of taking possession of the house and putting it on the market to recover the outstanding mortgage amount.
Any money from the sale of the house will first be used to pay the remaining balance of the mortgage, with any additional proceeds going to the borrower. If there isn’t enough to cover the mortgage, the lender can then take the borrower to court to recoup its costs.
In the remaining provinces of B.C., Alberta, Manitoba, Saskatchewan, Quebec and Nova Scotia, the process heads straight to a judicial foreclosure, which, as the name suggests, involves the courts.
When the lender obtains its Certificate of Foreclosure, ownership transfers to the lender and it can often sell at any price to recoup its mortgage funds. Once that happens, the borrower has no right to any capital gains from the sale of the house. Depending on the province, the lender cannot sue the borrower for the deficient amount if the home sale doesn’t generate enough proceeds to pay off the mortgage. But laws vary by province.
Current Arrears Statistics
The latest data from the Canadian Bankers Association (CBA) shows a mortgage arrears rate of 0.24% of all outstanding mortgages (as of the fourth quarter of 2019). This works out to a total of 11,438 mortgages in arrears out of a total of 4.8 million.
The rate was highest in Saskatchewan (with an arrears rate of 0.88%) and lowest in Ontario (0.09%) and British Columba (0.15%).
Of course, these statistics don’t capture any of the time period covering the COVID-19 pandemic, which has caused skyrocketing unemployment and an expected jump in mortgage arrears.
The biggest problem with official arrears data is that CBA is very slow to report it.
Mortgage Arrears Forecasts
Unfortunately, there’s no clear consensus on where Canadian mortgage arrears rates may be headed.
In April, TD Bank estimated arrears would stay below the long-term average of 0.38%.
The Bank of Canada’s latest estimation, however, was for arrears to peak at 0.80% by the third quarter of 2021, again up from the latest figure of 0.24%.
Then, on Tuesday, the head of the Canada Mortgage and Housing Corporation delivered a shocking forecast that up to one in five mortgages would end up in default if the Canadian economy doesn’t recover “sufficiently.” He later said that a 2% arrears rate was more likely.
Even 2% would be extreme by Canadian standards. The highest arrears in modern records was about 1.03% in the early 1980s.
What to Do If You’re at Risk of Defaulting?
If you’re unable to make your mortgage payment, the first steps are to cut your costs as best you can and contact your mortgage lender right away. Lenders are far more likely to work with you if you call them before you miss a payment and you’re proactive and upfront about your financial problem.
When you call, tell them what’s happened, tell them how long it will be before you can make your payment(s) and offer to pay what you can now. If you’re not sure how long it will be before you can make your payments, ask honestly for help to come to some kind of arrangement.
If your mortgage is default insured (through CMHC, Genworth or Canada Guaranty), call your insurer. If you’re legitimately in need, they might be able to extend your amortization, offer payment deferrals or make other payment arrangements.
Failing success with that approach, you should contact a lawyer or credit counsellor who may be able to help you navigate the situation by other means.
If there are no further options, such as listing the home for sale and using the proceeds to pay off your outstanding balance, the home would then fall into foreclosure.
How Can you Avoid Arrears?
If you’re only temporarily unable to make your payments and want to stay in your home, here are examples of options (some less palatable than others):
- Ask for a mortgage deferral due to hardship (about 1 in 5 mortgagors have received mortgage deferrals during the coronavirus)
- Get a loan from family
- Find someone to rent a room in the home
- Take a second job
- Sell other assets
- Take a cash advance on a credit card (we hate this option, but losing your home isn’t good personal finance either).
None of these are ideal solutions, but if you’ll be able to get back on track in 3-4 months, such stop-gap measures can work. And get debt counselling advice early in the process as credit counsellors may be able to recommend other options.
If you feel you’ll be unable to make your mortgage payments long term, consider selling before you lose the home. And once you make the decision, don’t waste a single day in the sale process. Lenders don’t often give delinquent borrowers much leash.
In all such cases, keep your lender fully and promptly apprised of your intentions so they give you more leeway.