In 2022, the mortgage industry was ruled by the Bank of Canada’s (BoC) mission to rein in inflation through a series of interest rates hikes. The year ended with a target overnight rate of 4.25%—the highest it’s been since early 2008. The BoC’s seven rate hikes last year, which started at 0.25% in March, have been particularly strenuous for homeowners with a variable rate mortgage. As a result of the increased rates over the past year, the housing market has cooled, bringing down record-high home prices. However, some homeowners have seen their mortgage costs more than double, leaving them confused and overwhelmed over how to proceed. This year, many are bracing for an economic slowdown, or possibly even a recession. In addition, economists are still bracing for the possibility of another interest rate hike by the third quarter of 2023.
As we know, history is often the best indicator of our future. This article covers some of last year’s major industry insights, including the regulatory landscape, mortgage tech, and the private lending space to understand what we might expect in 2023.
At the start of last year, variable mortgage rates were substantially lower than fixed mortgage rates, swaying many Canadians away from a fixed rate mortgage. Following the BoC’s rate increases, homeowners with variable rate mortgages saw their borrowing costs approach the point where their fixed monthly payments could only go towards loan interest without being able to reduce the principal amount (also known as the trigger rate). As a result, the popularity of variable rate mortgages waned.
Since June 2022, more than half of mortgage borrowers opted for a fixed-term mortgage, according to the Canada Mortgage and Housing Corporation (CMHC). However, as rates appear to be nearing a peak, prospective homebuyers are still considering variable rates in hopes that their costs will adjust down if rates begin to soften. Everyone’s eyes will continue to be on rates this year, and while it’s hard to predict the rise and fall, economists are expecting that the decline will come. Still, the timeline remains uncertain. If your client is undecided, they may want to consider a short-term fixed-rate mortgage so that they are only locked in for one or two years, and can sooner take advantage of lower borrowing costs when rates decline.
The mortgage stress test is also expected to stay the same through 2023 due to the uncertain economic environment, despite calls from some corners to drop the B-20 rules. The Office of the Superintendent of Financial Institutions (OSFI) announced in December 2022 there will be no change to the test. Canada’s mortgage stress test has been a major barrier to prospective homebuyers, preventing many from qualifying for a mortgage, and it only worsened last year, as mortgage rates significantly increased. The stress test, which was introduced in 2018, requires homebuyers to qualify for a mortgage at 2% above their contracted mortgage interest rate or at 5.25%—whichever is higher—to help prevent defaults in the event rates rise.
In addition, Canadians will have to consider new rules later this year related to certain types of real estate loans. OFSI is introducing rules that will mainly affect borrowers that have a combined loan, which is a conventional mortgage paired with a revolving line of credit, known as a HELOC. Homeowners can draw on their HELOC as they see fit, without any obligation to repay that portion on any fixed schedule. Currently, a homeowner can borrow up to 80% on this type of loan. Under these new rules, a borrower that owes more than 65% of their home’s value, will have part of their monthly payment go toward reducing the actual loan amount until it falls below 65% of the home’s value (rather than simply cover the interest). OSFI states that consumers will not see an increase to their monthly payment requirements and the changes will not affect new home buyers.
In 2022, mortgage players that embraced technology to innovate their systems gained a significant advantage over their competitors. At CMI, we recognized the importance of digitization to support our broker partners from the very start. Consumers have come to value an efficient client experience, personalized solutions, and a seamless application process more than ever before. Over the COVID-19 pandemic, even the most resistant were forced to adopt certain tech processes into their routine, including e-signatures and electronic documentation submission. However, banks and other traditional lenders grappled with modernizing their dated systems. These lenders still require significant documentation and time during the application and approval process, and are bound by tight restrictions and outdated technology. As a result, prime lenders were limited by the range of mortgage solutions they could offer and shut the door on many prospective homeowners, leaving a gap that private and alternative lenders were able to fill.
In 2023, technology will continue to play a growing role in the evolving mortgage landscape, as the needs of Canadian homebuyers are expected to continue to change during economic volatility. Among other tech advances, the Government of Canada stated that it is exploring the safe introduction of open banking, which is set to bring more opportunities to consumers and encourage increased competition. Open banking, which is already available in other countries like Australia and the UK, offers a secure way for a consumer’s bank to share their financial data securely with fintech companies, which provide online financial products or services. A major benefit of open banking, if it becomes available, is that it could increase consumer choice and improve financial outcomes for Canadians. For financial professionals like mortgage brokers, it could result in more and better quality leads.
This year, consider tech-forward solutions and new lending partners to broaden the scope of what you can offer clients in a competitive timeframe, and help you determine the best fit for each unique borrower. At CMI, we are continually innovating to ensure we are connected to all major submission, open banking and other online platforms.
With a constricting regulatory environment, home buyers sought more options from their brokers in 2022. Even though private mortgages were growing in popularity before the COVID-19 pandemic, the tumultuous conditions over the past two years have fueled even greater activity within space. During this time, potential borrowers who lost or left their job could no longer qualify for bank financing. It’s expected that this trend will continue in 2023, with a larger share of mortgage borrowers renewing their private mortgages.
As a result, it’s important for brokers to be well-versed in alternative solutions, such as private mortgages, throughout 2023. Building strong relationships with a trusted private lending partner is key, as the market remains in a state of flux. Remember that private lending rates are not generally driven by the bond market, so lenders like CMI can offer flexible financing with common sense pricing to meet the needs of your clients, even if they don’t qualify for a prime mortgage.
Given the growing popularity of private lending, be sure to pay close attention to your private lending partner’s track record as well. Chairman of the Canadian Alternative Mortgage Lenders Association, Dean Koeller told the Financial Post that, “investors are more cautious as to how alternative (investments) and, really the overall real estate market, is adjusting to higher interest rates.” In other words, smaller, less established private lenders may not be your client’s best option, as they may not have the resources and funding during turbulent times. CMI, which has funded well over a billion dollars in mortgages, is not exclusively a MIC and has other sources of funding. As a result, CMI has continued to scale operations over the past few years, while other private lenders were forced to freeze new applications.
While there’s no way to truly predict what will happen to the mortgage and housing market in 2023, mortgage brokers have a real opportunity in the year ahead to continue educating and guiding clients through these uncertain times. Whether it’s helping clients with a variable rate mortgage switch to a more suitable solution, change their amortization or term to reduce payments, find ways to access additional financing, or explaining why they should maintain their status quo, home buyers and owners will be turning to you.
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