Canada’s Banking Risk and Rising Mortgage Defaults: Homeowners Edition
Image courtesy of Market Mania
Recent data has revealed a concerning trend among two of Canada’s largest banks, RBC and CIBC, as mortgage and other loan delinquencies skyrocket—raising questions about financial stability and risks that can impact everyday Canadians. Understanding what’s happening behind the scenes, and how it might affect your own mortgage or finances, is vital right now.
The Alarming Numbers: Millions in Default But Diminishing Safeguards
RBC and CIBC hold some of the largest loan books in Canada—RBC with $1.1 trillion and CIBC with $622 billion in loans. Despite a surge in delinquencies (loans past due or in default), both banks have been decreasing their loan loss provisions, the money set aside to cover potential bad debts. For RBC, this means potentially $11 billion in risky loans but only $881 million reserved. At CIBC, around $6.2 billion loans could be at risk with just $559 million provisioned.
This disconnect raises the risk that as more borrowers struggle to repay mortgages or other debts, banks’ earnings and balance sheets could face serious pressure.
Why Are Delinquencies Increasing?
Rising mortgage delinquencies mainly stem from Canadians holding mortgages from the past five to ten years when property prices were at peak levels. Many homeowners today owe more than their homes are currently worth, especially in regions like Ontario where some properties have lost up to 30% in value.
For example, a Hamilton detached home purchased in 2023 for $630,000 recently sold for just $260,000—a staggering 60% drop below its 2015 price. Homeowners in this situation face difficult choices: selling at a loss or continuing to carry loans on properties with declining value, heightening default risk.
What Does This Mean for You?
If you are a homeowner, mortgage holder, or investor in Canada, these trends have direct implications:
Mortgage Renewal or Refinance: Borrowers may face tougher scrutiny and higher rates as banks seek to manage their risk.
Risk of Default: If property values drop further or financial strain increases, you could be at risk of missing payments—knowing your options and seeking advice early is critical.
Economic Impact: Rising delinquencies contribute to overall economic uncertainty, potentially affecting job security and lending conditions.
Consider the story of Michael, a homeowner in Toronto who bought at peak prices and is now facing a mortgage renewal. With property values down significantly, Michael worries about refinancing and possible higher rates due to banks tightening approval processes in the face of rising risk across their loan portfolios.
Why Are Banks Still Growing Loan Books and Cutting Provisions?
It might seem counterintuitive that banks are expanding their loans while reducing reserves for bad debt. One explanation is that banks optimize earnings by minimizing provisions, assuming government support would mitigate systemic risks in a worst-case scenario. However, this strategy could backfire if delinquencies continue to rise sharply.
What Should You Do?
Stay Ahead: Monitor your mortgage health, payment schedules, and property values regularly.
Seek Professional Advice: Consult mortgage brokers or financial advisors who understand the evolving risk landscape.
Have a Plan: If struggling, explore options early—loan restructuring, refinancing, or support programs—to avoid default.
Understand Your Loan Terms: Know your penalties, renewal dates, and flexibility to act decisively.
If you’re feeling uncertain about your mortgage or want help navigating these turbulent times, reach out to me, Mr. Mortgage (Kechanth Kannan). I specialize in guiding Canadians through market swings with tailored advice and support.
📸 Instagram: @_mrmortgage
Facing mortgage challenges isn’t easy, but with the right help, you can protect your financial future and make smart decisions amid uncertainty.
To learn more, visit the YouTube video that inspired this blog post: https://www.youtube.com/watch?v=hczl3ht0LAY
