What’s Being Predicted This Year For Canada’s Mortgage Market?

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Canada’s mortgage market finished the last decade in quite the way! From the plunge in interest rates, to the late-year surge in mortgage growth to the growing influence of online discount mortgage lenders, it was a year of milestones.

This year will probably have its own twists. But what do experts think might happen? Here are some predictions experts have made from following trends and consumer behaviour in recent years.

Decades on from the birth of the digital world, lenders are finally realizing how competitive they have to be to win borrowers. 2019 saw a new level of online-mortgage competition. Spreads between typical deep-discounted 5-year fixed rates and Canada’s 5-year swap rate (a rough proxy of a lender’s basic funding costs) shrank to its lowest on record. Instigating such rate battles were the likes of motusbank, HSBC and online brokers. This year alone will be even more competitive as brand new, digitally focused direct-to-consumer mortgage lenders enter the market, including one or more name brands you know well. The game is truly ON.

Last year, Bank of Nova Scotia tried something different to its big-bank friends by advertising its best mortgage rates online. Scotiabank’s eHome online mortgage application featured rates that most banks wouldn’t touch. Once customers noticed, over 100,000 borrowers tried the new software out. The “digital mortgage” race will only heat up in 2020 and the coming years. The rest of the Big Six will likely all roll out enhanced mortgage websites. Not all of them will quote highly competitive rates online, but one or two will, and that’ll be enough to drive even further rate competition in 2020.

Get ready for lots of lenders and brokers touting “instant mortgage approvals” this year. But it won’t be exactly what they say it is. That is because, unlike the United States, Canada doesn’t have the technology (yet) to automatically validate your income, employment and down payment electronically. That means most, if not all, “instant approvals” will be overhyped conditional approvals delivered electronically to borrowers. “Conditional” means the lender still has to manually review your documents, and sometimes send out physical appraisers to your property, both of which are anything but instant. Honest marketing will play a big role with credibility here.

When unemployment starts rising from its cycle lows, when consumer insolvencies hit multiyear highs, when the % of disposable income consumed by debt payments hits a record, when the yield curve inverts and signals an economic slowdown, rising mortgage delinquencies will become a major issue. It’s probably happening already…

The next 10 months won’t be a default disaster by any stretch, but today’s 90-day mortgage arrears rate of 0.23% may look good in comparison to next December’s.

The perverse phenomenon of 5-year fixed rates selling for less than variable rates will end in 2020, at least temporarily. Whereas the average 5-year fixed is about 15 basis points below the average variable today, fixed rates will be back on top. (A basis point is 1/100 of a % point.) That will motivate a small percentage of borrowers to shift from 5-year fixed to variable-rate mortgages. Longer-term, the fixed-variable gap will stay narrower than it has in the past and go negative more frequently, meaning you’ll pay less for the “insurance” of a long-term fixed rate.

There may be other things to potentially watch out for, but not as likely as the predictions above.

Regulators could add a stress-test exemption for people switching lenders and/or change the stress test’s minimum qualifying rate.
The federal government’s First-Time Home Buyer Incentive could get easier to qualify for in Toronto, Vancouver and Victoria.
The banking regulator might approve people’s ability to buy a home selling for more than $1-million with just a 10% down payment. (The current minimum is 20% of the purchase price.)
There could be a noticeable pickup in the number of people using provincially regulated credit unions to get around the federal mortgage stress test.
The national average home price should grow at a pace closer to the 6.2% forecast by the Canadian Real Estate Association than the analysts’ consensus forecast of 3%.