Frontenac Blog

Why mortgage defaults won’t spike in 2023

Blog-Date-1Feb 01, 2023

Even amidst soaring rates, people will protect their homes

With market instability and soaring interest rates, there is a lot in the news about the potential for Canadians to default on mortgages. Advisors that are interested in investments such as Frontenac MIC, which depend on homeowners reliably paying off their mortgage debt, are rightfully curious.

The current situation

Canadians love their homes. Whether they just bought a tiny condo or have a long-held family house, they’ll do whatever they can to keep it. Even when interest rates are climbing — which they are, at a fast rate.

In January 2023, the Bank of Canada raised the target overnight bank rate to 4.5%, in a dramatic turnaround of rates over the previous 10 months or so — in March 2022, the overnight rate was a mere 0.25%.

Yet, mortgage default rates remain at record lows. As of December 2022, the number of mortgages in three-month arrears or more across the country was just 0.14%, according to the Canadian Bankers Association.

While the Bank of Canada may pause hikes for now — but will resume if inflation does not continue to slow — clearly the country will be in a higher rate environment for the short-term future.

Nonetheless: our position is that people will not default on their mortgages in droves, even among those who purchased their homes at high price tags, expecting to pay rock-bottom rates.

In late December 2022, Fitch Ratings released its 2023 outlook, predicting a 0.25% delinquency rate in 2023, which is a sharp rise from current levels, but still very low.

Homeownership is a clear priority in the minds of most Canadians, especially as it becomes more difficult for younger generations to attain.

Paying things off

As a population, Canadians tend to prioritize managing their debt — including their mortgage debt — in tough times. They’ll slash their spending elsewhere to make debt payments according to a recent CIBC poll.

For instance, as interest rates and inflation rose in late 2022, 60% of Canadians reported they would spend less on holiday gifts, according to Equifax Canada.

Protecting their investment in their home is a prime motivator. The value of homes has soared in recent decades.

Housing is now most people’s largest asset and a major source of wealth for millions of Canadian households. According to Statistics Canada’s 2019 Canadian Survey of Financial Security, principal residences account for more than a third of the total value of Canadian assets. Further, homeowners nearing retirement had a median net worth of $685,400 as compared to the $24,000 net worth of non-homeowners.

Meanwhile, other economic factors are contributing to Canadians’ ability to continue to pay down their mortgages.

  1. The unemployment rate in December 2022, according to Statistics Canada, stood at just 5.0% — it’s now below pre-pandemic levels.
  2. Although the housing market has slowed dramatically because of higher rates, there’s still a national housing shortage. The Canada Mortgage and Housing Corporation estimates the country needs 22 million new housing units by 2030, a deficit of 3.5 million units at the current rate of construction. The shortage is no longer a problem in big cities only, but in small towns as well. For people facing a challenge in paying their mortgage, the option to sell their homes to avoid defaulting is a quick and easy out.

Investment opportunities

Those who hold investments in the mortgage market may worry that defaults will rise as the economy shifts. And if homes become dramatically harder to sell or unemployment soars, it’s true that those default numbers may inch up, but they are not likely to spike.

With unemployment so low and the housing supply a problem that’s likely to get worse before it gets better, today’s homeowners have a great deal more going for them than against them.


Plus, none of these economic factors will change how Canadians feel about protecting their homes.

Real estate investors will be in good stead in the coming years. While Canadians may find their wallets tapped, they will continue to prioritize their homes above all.