As we head into 2019, Canadian mortgage brokers are saying the real estate market will be all about getting — or not getting — access to lending. And even for those who do manage to score a mortgage, it may not be as much as they were hoping for in order to buy their dream home.
Birgit Holm, a mortgage consultant with Mortgage Alliance in Port Moody, B.C., says lenders will increasingly be reviewing customers use of credit and their ability to afford and maintain this credit. Plus, borrowers better realize that those qualifying calculations by the lenders will be integral. Lenders will be doing their risk analysis and mortgage qualifying based on the assumption that people will use their maximum credit limit.
“I see people struggling to qualify for a mortgage under the new stress test rules,” says Jivan Sanghera, Principal Broker with Circle Mortgage Group in Mississauga, noting that the new stress test rules have meant a qualified borrower has seen about a 25% decrease in mortgage purchasing power.
Robert McLister, a mortgage planner at intelliMortgage and founder of RateSpy.com agrees. He adds that one consequence of the tougher qualification rules is a trend towards non-bank lending. As fewer applicants qualify with low-cost prime lenders, such as banks, those denied a mortgage will turn to alternative sources, such as mortgage investment corporations (known as MICs), credit union and other private lenders that use the former (and easier) stress tests that were in place prior to 2018.
“For this privilege, these non-federally regulated lenders charge higher rates,” he says. The problem with this, he adds, is that the higher rates will increase the monthly payments the borrower has to pay and set these “banished borrowers” up for vulnerability going into the next recession.
James Laird, President of Canwise Financial and a co-founder of Ratehub, points out that this move towards unregulated lenders is an unintended consequence of the tighter rules for regulated mortgages. “For those who don’t qualify for a traditional home, and don’t end up buying the house, the tightening of the rules has worked in terms lowering risk,” he says. “But what about those who still want to buy a house and have to turn to an unregulated lender where they pay higher rates — isn’t that riskier?”
Despite the potential for more risk, Laird notes that these private lenders, who are not regulated like traditional banks, fulfil a need in the marketplace.
Prediction #1: More borrowers will turn to alternative lenders
Holm notes that there has always been a large segment of the borrowers who have relied on alternative financing, for example, the 15% of the population that Canada Mortgage and Housing Corporation estimates are self-employed. But the number of Canadians who would likely have to use alternative forms of lending is growing, she says, pointing to a report by Intuit Canada that states that freelancers, independent contractors, and on-demand workers will make up 45% of the Canadian workforce by 2020.
“There is an increasing number of people who used to be able to get a regular bank or monoline mortgage who no longer qualify under new guidelines and have to turn to alternative forms of financing,” says Holm. She adds that alternative financing used to be more of a short-term solution for most clients, but now in some cases, it’s becoming a longer-term solution.”
As for costs, Holm says this type of financing can be higher, with borrowers paying between 5% to 12% in real costs for these mortgages, “but it is still a viable and valuable option for many Canadians.”
Prediction #2: More online or over-the-phone transactions
Another trend that mortgage brokers see continuing into 2019 is less face-to-face mortgage service, as banks ratchet up their mortgage call centres to better serve increasing numbers of online mortgage shoppers. McLister says that shrinking mortgage profits, thanks to a smaller pool of qualified borrowers and online competition, will ensure that the best mortgage rates will be offered through online lenders and brokers.
“Expect the ratio of mortgages closed by the bank reps and brokers who actually meet their clients in person to drop in 2019,” says McLister. “For well-qualified borrowers, the days of walking into a branch to get a mortgage are slowly coming to an end.”
Laird agrees that most potential homebuyers’ journey to find a mortgage starts online, but he says, ultimately, there will “have to be some human interaction.” It could just be a phone call, but people still need the comfort level that comes with working with a real person.”
Prediction #3: Stricter guidelines for HELOCs
Another trend mortgage experts like McLister are seeing is how the tightening of the lending rules will also lead to stricter guidelines on Home Equity Lines of Credit (HELOC). Even if there is no debt drawn on the HELOC, lenders will factor that borrowing capacity going through the qualification process for a borrower. Most of this tightening of HELOC guidelines will come from banks taking voluntary action, rather than explicit rules decreed by the likes of OFSI.
Practically speaking, the tightening of HELOC rules will affect those who already have a home and have built up some equity to provide some borrowing capacity. But it also means those with HELOCs may not qualify for a higher mortgage if they opt to sell and upsize.
Prediction #4: Higher mortgage rates
Mortgage brokers are expecting interest rates will continue to increase in 2019, as the Bank of Canada is focused on managing inflation, first. However, Holm suggests that there might not be as many rate increase announcements coming as expected. She points to the current woes in the Alberta oil patch — where the price of Western Canadian Select oil has plunged, now trading about $30 less than WTI. Holm said she was originally expecting as many as four increases in the prime lending rate in 2019, but is now “thinking more likely just two increases because of Alberta.”
Prediction #5: Fixed-rate mortgages will win the popularity contest
In anticipation of higher rates, brokers note that there is a preference for fixed-rate mortgages rather than variable rates. “Most people seem to be opting for the fixed, with those choosing the variable option generally having a smaller mortgage and a shorter timeline,” says Laird.
Sanghera of Circle Mortgage Group says that he has often received calls from clients with a variable rate wanting to convert to a fixed rate, calling these “panic conversions.” He adds that the problem with locking in a fixed mortgage now, especially with some economic volatility on the horizon that could potentially curb those rate increases, is that “you might be locking in on the wrong part of the curve.”
Prediction #6: Falling home prices
One side effect of higher rates and more uncertainty over the economy, brokers suggest is that the sale prices of homes will drop in 2019. Regional economics will have a bigger impact on values for 2019, says Holm, pointing to employment growth, wage growth in particular regions creating consumer confidence that encourages home buying.
Laird also notes that while overall housing prices will likely flatten, there will be pockets where appreciation will still continue, especially well-priced homes aimed at first time buyers. “For example, we expect condo prices in popular areas such as Toronto to continue to appreciate.”
The silver lining to a less frenzied real estate market is that those who do qualify for a mortgage and are looking to buy will be less frustrated by the process. “I am seeing clients being able to make offers subject to financing, and seeing more accepted offers below the list price,” says Holm. “We are not seeing the multiple offer situation we had in previous years, and the slow down in the market has alleviated that frustration for buyers.”
Though there are definitely a number of factors affecting home buyers and homeowners currently, mortgage brokers point out that historically Canadians have had cycles of higher interest rates and slower housing markets. Says Holm: “The key to weathering these real estate cycles is to have a plan and work with reputable mortgage professionals when making real estate financing decisions.”