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What is influencing mortgage arrears?

Deferral programs kept mortgage arrears from reaching unprecedented highs, although a fiscal recovery from the pandemic would be a significant challenge for Canadian households, according to data from the Bank of Canada.

In a recent research note, the central bank calculated the impact of “a deep but short-lived recession” on mortgage delinquency.

During the second quarter of 2020, the arrears rate with deferrals would’ve been at 0.26%, versus the no-deferrals rate of 0.63%. Subsequent quarters would’ve seen even larger differences, with the most precarious gap apparent in Q4 2020’s with-deferrals rate of 0.3% and no-deferrals rate of 1.29%.

This record-high no-deferrals rate “is slightly higher than the historical peak of 1% witnessed in the early 1980s,” the BoC said. “Once we account for payment deferrals, the picture is much more favourable. With deferrals, the arrears rate remains relatively flat over much of 2020, eventually rising to a peak of 0.5% in the second quarter of 2021.”

The central bank added that these figures take into account that the April 2020 labour underutilization rate of 36% represents the peak, with the implication that “a full recovery will occur within four quarters.”

“The effectiveness of deferrals in limiting the rise in arrears depends crucially on the speed of recovery in the labour market,” the BoC said. As to how long Canadians will need to recoup their losses during the pandemic year, the bank admitted that this is a difficult prediction to make.

In the case of natural calamities, “the rebuilding process can begin relatively soon after a disaster has occurred, contributing directly to the broader economic recovery,” the BoC stated. “In contrast, the COVID‑19 pandemic has a global reach, and its aftermath is much more uncertain. Economic activity will undoubtedly rebound as mandated lockdowns are gradually eased. However, this will likely be a sluggish process, meaning some of the macrofinancial effects of the pandemic could linger.”

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