Borrowing rates

Problems in ‘mortgage land’ as higher borrowing rates weigh and refinances dry up


Canada’s housing market has been on the right track for years, but the Bank of Canada’s aggressive interest rate hike path and the possibility of a recession are ushering in a new economic reality that is beginning to weigh on the demand for mortgages, according to industry observers.

David Larock, mortgage broker and president of Toronto-based Integrated Mortgage Planners Inc., said he’s definitely seeing a drop in business in light of the new conditions, but said he’s seeing different effects in regarding refinances versus new purchases. .

“Typically, until very recently, about half the business I got was refinances and the other half was purchases — and of course both were hit by higher rates,” Larock said. . “But…I would say the most significant impact I’ve seen so far has been on refinances.”

Larock said it was because for a time customers looking to refinance were breaking a mortgage with a higher rate than the refinance rate, providing a tailwind – especially as the pandemic has brought rates ultra-low in the market. That business, he said, has been hit hard now that rates are rising aggressively.

“The only people refinancing today are the ones who really need it,” Larock said. “I would say that the short-term refinancing activity has indeed dried up…a ​​little, but not a lot.”

On the buy side, Larock noted that it’s unclear whether the slowdown in new residential mortgages stems from a typical lull in the summer season, or whether more customers are in a wait-and-see mode to see if prices might come down. .

Leah Zlatkin, expert and licensed mortgage broker, said she’s seeing a shift in the types of customers she’s seeing.

Customers looking for new mortgages tend to be less conventional and need more flexibility. An example: the number of mortgage applicants in the gig economy who turn to private financing.

“I think what that lends itself to is that we had a giant wave,” Zlatkin said. “Last year was a huge wave – a tsunami even – of mortgages and records that swept through our offices, and right now we’re kind of in the spot of the wave where the big wave hit. and we’re kind of in the foam, so the foamy offerings are always a little more jerky, a little less conventional.

For more conventional clients who have been on the sidelines, Zlatkin thinks it’s a question of where prices will head over the next few months and whether or not fears of a sustained recession materialize.

“A lot of people kind of wait; want to see what will happen with the next rate hike before they jump in,” Zlatkin said. “The question is: how long are you waiting? How do you know when we’re at the bottom? And what is the best opportunity for you? And can you accept certain risks? It’s sort of where our customers are sitting right now and what they’re looking at.

The Bank of Canada has already raised its key rate four times this year, raising the overnight rate from 0.25% to 2.5%.

The downturn in the mortgage market is also leaving an imprint on the companies that provide them, from mortgage brokers to banks, who have quickly raised their prime rates to follow the lead of central banks.

A National Bank of Canada memo dated July 26 called the mortgage finance industry “no man’s land,” with mortgage lender stocks also hurt by political uncertainty stemming from efforts by the Office of the Superintendent of Financial Institutions. to reduce mortgage market risk.

“Overall, we believe Mortgage Land’s relative underperformance will persist in the near term, at least until the uncertainty around these risks subsides,” wrote the National Bank analyst and author of the report. Jaeme Gloyn report. “As a result, we are lowering our multiple targets across the board.”

Companies such as Equitable Bank Inc. (with its price target dropping from $86 to $75), First National Financial Corp. ($36 to $35) and Home Capital Group ($38 to $35) were among those caught in the mix.

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