Canadians have faced a tough few years as inflation and interest rates have skyrocketed. The impact of higher rates has been felt in the housing market, both for prospective buyers/sellers and homeowners. This has led many to park their real estate journey. On December 6, the Bank of Canada announced its final rate hold of 2023. However, the 10 rate hikes since March 2022 have changed the mortgage industry and brought on new trends. Here’s how the mortgage industry evolved in 2023.

Lender Popularity and Loan Terms are Changing

One of the most prominent trends is the increasing market share of non-traditional lenders. While maintaining the largest share of outstanding mortgages, the traditional big six Canadian banks (TD, Royal Bank, Bank of Montreal, Scotiabank, CIBC, and National Bank) saw market share for newly extended mortgages decline by 5.9% in the first quarter of this year. However, non-bank mortgage lenders, mortgage investment entities and other chartered banks all experienced an increase in their share, with non-bank mortgage lenders seeing a 1.9% increase and mortgage investment entities a 2.9%, according to Statistics Canada.

For chartered banks, new and refinanced mortgages were down by 44% and 34% respectively compared to last year, according to CMHC. This drop came from declining interest in the real estate market in the earlier part of 2023, after the flurry of activity in early 2022 before interest rate hikes quelled the market. With rates steadily increasing, fewer chose to refinance and those that had to renew often faced higher rates and tightened affordability. To counteract higher monthly mortgage payments, many homeowners chose to re-amortize their loans leading to two in every three mortgages in the first half of 2023 having amortization periods over 25 years, compared to one in two in 2022.

Homeowners Continue to Prefer Fixed-Rate Mortgages

Homeowners continue to favour fixed rate mortgages, whether they’re buying or renewing. A fixed rate mortgage is currently more affordable than a variable rate. While Canadians are optimistic that the Bank of Canada will lower rates in 2024, the persistent rate hikes throughout the last two years have driven buyers away from variable rate mortgages.

Last month, National Bank analysts suggested that homeowners are beginning to accept that higher rates are here to stay, mentioning that this is leading to mortgage loan holders locking in fixed rates to avoid future uncertainties. “Bank of Canada officials are helping to ingrain this, telling Canadians to brace for an era of higher borrowing costs,” the note said.

The stability a fixed rate provides is important to homeowners. In the first eight months of 2023, $244.5 billion was lent for new and renewed fixed rate mortgages, according to CMHC. This is in contrast to the $20.4 billion lent for variable rate mortgages.

Canadians Beginning to Feel the Strain of Higher Borrowing Costs

A more concerning trend of the higher interest rates of the last two years is how it’s affecting the debt of the average Canadian. Anyone who has renewed their mortgage lately will likely be doing so at a higher rate than when they last renewed.

In the first two quarters of the year, 290,000 borrowers renewed their mortgage at a significantly higher rate with a chartered bank, according to CMHC. Particularly, many Canadians who bought during 2020 and 2021 when interest rates were historically low will be feeling an exaggerated squeeze with rates nearly 5% higher than they were when they bought.

One potentially positive indicator is the amount of mortgages in arrears. Numbers are currently at historically low levels at just 0.15%, despite higher borrowing rates, according to the Canadian Bankers Association. However, looking at mortgages with second and third stage delinquency rates paints a different picture. The number of homeowners who are late on their payments by between 30 and 59 days or 60 and 89 days has increased in the second quarter of this year compared to 2022. While arrears of 90 days or more are historically low, the increase in second and third stage rates would suggest that homeowners are beginning to feel the strain, and those late payments could persist.

Navigating The New Norm : Evolving Trends in The Canadian Mortgage Industry by by Daniel Crook | zoocasa