Trouble in ‘mortgage land’ as higher borrowing rates weigh and refinancings dry up

‘The only people refinancing today are the people who really need to’

Canada’s housing market has been on a roll for years, but the Bank of Canada’s aggressive path of interest rate hikes and the possibility of a recession are ushering in a new economic reality that is beginning to weigh on mortgage demand, industry watchers say.

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

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

Larock said this is because for a while, clients looking to refinance were breaking a mortgage with a higher rate than the refinance rate, offering a tailwind — particularly as the pandemic brought ultra-low rates to the market. This business, he said, has been hit hard now that rates are rising aggressively.

“The only people refinancing today are the people who really need to,” Larock said. “I would say the refinance business over the near-term has effectively dried up … a little bit, but not much.”

On the purchase side, Larock noted it was a challenge to determine whether the slowdown in new residential mortgage originations stems from a typical summer season lull, or if more clients are in wait-and-see mode to see if prices could go lower.

Leah Zlatkin, expert and licensed mortgage broker, said she is seeing a shake-up in the types of clients she sees.

Clients seeking new mortgage originations have tended to be less conventional and require more flexibility. One example: the number of mortgage-seekers in the gig economy who are moving towards private financing.

“I think that what that sort of lends itself to is that we’ve experienced a giant wave,” Zlatkin said. “The last year has been a huge wave — a tsunami even — of mortgages and files coming through our desks, and right now we’re sort of at the place in the wave where the big wave has hit and we’re sort of in the foam. So, the foamy deals are always a little bit more choppy, a little bit more unconventional.”

For more conventional clients who have been on the sidelines, Zlatkin believes it has been a question of where prices head over the next few months and whether or not fears of a sustained recession are realized.

“A lot of people are just sort of waiting it out; want to see what’s going to happen with the next rate hike before they jump in,” Zlatkin said. “The question is: how long do you wait? How do you know when we’re at the bottom? And what is the best opportunity for you? And can you accommodate some risk? That’s sort of where our clients are sitting right now and what they’re considering.”

The Bank of Canada has already raised its policy rate four times this year, shifting the overnight rate from a half of a per cent to 2.5 per cent.

The downturn in the mortgage market is also leaving a mark on the businesses that provide them, be they mortgage brokers or banks, which quickly hiked their prime rates to follow the central banks’ lead.

A National Bank of Canada note on July 26 characterized the mortgage finance industry as a “no man’s land” with mortgage-lenders’ stocks also being hit by policy uncertainty stemming from the Office of the Superintendent of Financial Institutions efforts to derisk the mortgage market.

“Overall, we believe Mortgage Land’s relative underperformance will persist in the near term, at least until uncertainty surrounding these risks diminish,” wrote National Bank analyst and author of the report Jaeme Gloyn. “As a result, we lower our target multiples across the board.”

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

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