Determining the effects of the new coronavirus on Canada’s mortgage market is an ever-evolving endeavour.
Earlier this summer, we saw that thanks to all-time low-interest rates, more Canadians were opting for the security of a fixed-rate mortgage, and that new home purchases were down while mortgage, renewals were up. Then in August, we published a housing trends report with predictions from experts about what could happen to the country’s housing market when the second wave of COVID-19 hit.
Now that the second wave is well underway, some new trends have begun to emerge. In order to get a sense of what’s happened to the mortgage market against the backdrop of the pandemic, we looked at internal LowestRates.ca data and spoke to mortgage experts to get a sense of what’s going on on the ground.
- Some brokers are seeing an increase in larger mortgages in the GTA, which in addition to more expensive houses, could be attributed to people “moving up the economic ladder” due to decreased costs from working remotely.
- The end of mortgage deferrals may not trigger a drop in national home prices, as previously predicted. We could see less of an effect on the market than previously thought.
- Toronto’s condo rental prices have started dropping as listings rise, but the market is expected to rebound as the economy recovers.
- While COVID-19 influenced changes to the mortgage stress test rules, some brokers say this hasn’t had any real impact on people’s home buying behaviour.
- Down payments are averaging about 20% in the more expensive markets of Ontario and B.C. since the pandemic began, but are lower in other parts of the country.
Larger mortgages in Toronto amid pandemic
The Toronto housing market still hasn’t flinched much in the face of COVID-19 — something we called attention to in our last mortgage trends report. In fact, Shawn Stillman, principal broker at Mortgage Outlet, says he’s actually seeing larger mortgages in the GTA than he did before the pandemic. Up until this year, mortgages of $1 million or more have been rare, he says. In the 10 years, Stillman has been a mortgage broker, he figures he’s done about 20 of them. This year, however, he’s regularly seeing mortgages in the $1- to $3-million range.
“People are still looking around and have a lot of inquiries since rates have gone down,” says Stillman. “The mortgage market is definitely fluid right now and it’s healthy. It’s not quite a buyers market, and not quite a seller's market.”
A good chunk of people, Stillman says, “are moving up” the economic ladder thanks to decreased costs due to working remotely, and are taking advantage of exceptionally low mortgage rates. Property values, as well, have increased in the Toronto area, which means people have equity in their houses. “The government has done a very good job of protecting property values,” says Stillman. First, through the CERB payment, which protected people’s cash flow, and second, through the Bank of Canada’s decision to buy mortgage-backed bonds, which Stillman says drove down mortgage interest rates and kept demand for mortgages high.
“The combination of those two things was very powerful,” he says. (The Bank of Canada’s bond-buying program recently ended and it remains to be seen whether or not that move could increase mortgage rates.)
Of course, condos present a different story, particularly in the GTA and Vancouver, where prices have fallen significantly as of late.
Will Toronto condo rental prices continue to drop?
The new coronavirus is putting some downward pressure on the condo rental market in Toronto. An increase in listings has prompted rental prices to start dropping in the city.
“The condo market in Toronto right now is a lot different than the single-family housing market,” says Stillman. “The condo market is highly dependent on rentals and immigration. And because students have not been coming to school there are 20,000 people who usually rent that are not in Toronto right now renting, so that’s pushing down the rental market, which is pushing down rent.”
Paul Taylor, president and CEO of Mortgage Professionals Canada, suspects a lot of people who are selling in the small condominium segment are investors looking to cash out on whatever gains they had made before.
“It might be harder to generate enough revenue to carry those mortgages,” says Taylor. The lull in immigration over the summer triggered “a significant reduction in the need for rentals. We don't have the same level of transient workers or foreign students coming this year.”
As the pandemic rages on will condo rental prices in Toronto continue to fall?
“We definitely are seeing a bit of a cooling in the condo market downtown," says Leah Zlatkin, principal broker at Brite Mortgage. "But I don't know if that cooling is dramatic enough to really see a huge drop in prices.”
That mortgage deferral ‘cliff’ might be more of a ‘ditch’
The mortgage payment deferral period, which lenders implemented at the beginning of lockdown, has officially ended. The last chance for those to request deferrals was at the end of August, which allowed people to defer payments until the end of December.
For some time now, we’ve heard experts warn about the danger that lies ahead once mortgage deferrals end and people are required to resume making regular mortgage payments plus interest. CMHC president and CEO, Evan Siddall, has called this the “debt deferral cliff," and has said that one-fifth of all outstanding mortgages could potentially be at risk of going into default.
"I don’t think there’s really going to be a cliff," says Zlatkin. "There's going to be more of a little ditch. A few people might fall into it, but I don't think it's going to be a big deal."
Home Capital, for instance, has ended 97% of the mortgage payment deferrals it approved for customers, according to a recent Globe and Mail article. And the mortgage lender is not seeing an increase in defaults. In fact, it’s seeing strong repayment rates.
Taylor says it’s too early to tell what the impact of deferrals on the market will be. “There's an awful lot of factors at play,” he says. First, not everyone approved to defer their mortgage payments this year was facing financial hardship at the time. When the program first became available there was a lot of uncertainty, which resulted in Canadians taking advantage of the opportunity to save or pay down high-interest debt like car loans and credit cards over their mortgage. Second, there are many people whose incomes have been protected by significant federal government support programs. “You might find that some people will emerge from the deferral program able to resume making payments,” says Taylor.
Even if homeowners can’t afford to pay for their mortgage once the deferral period ends, Zlatkin doubts a significant amount of those deferrals will turn into defaults right away. Foreclosure, she says, is a lengthy and complex process.
“It's going to be a slow-rolling process because this kind of thing doesn't happen overnight,” says Zlatkin. “There's a lot of extenuating circumstances. Every single home is different and every single lender is different, too. Just because one lender does it a certain way doesn't mean every lender does it that way.”
Down payment behaviour during the pandemic
In order to find out what impact the new coronavirus has had on down payment behaviour, we turned to LowestRates.ca’s mortgage quoter data. We can see, as a percentage, the average down payment residents who used our site in the past six months put down. This data covers down payments from April to September in the five provinces from which we receive the most mortgage quotes: Ontario, British Columbia, Alberta, Quebec, and Nova Scotia.
Residents of Alberta, Quebec and Nova Scotia put down significantly less than 20% on average during the pandemic whereas residents of Ontario and B.C. continued to put down about 20% on average.
In order to avoid CMHC mortgage insurance in Canada, homebuyers need to make a down payment of 20% or more. Could this explain what we’re seeing in B.C. and Ontario?
“People have always been taught to put down 20% to avoid CMHC insurance,” says Stillman. “When I speak to most people, that’s a goal that everyone wants to meet.” But beyond that, we have to look at the two major cities in these provinces: Toronto and Vancouver, where higher-paying salaried office jobs that could easily become remote are more plentiful.
“The economic impact of this has disproportionately impacted people that were in lower wage jobs to begin with,” explains Taylor. “And so a lot of people that were in more salary-based types of professional roles have been far less impacted. I think a lot of those salaried employees are feeling confident again... coupled with people reevaluating their living circumstances.”
So, says Taylor, if the majority of people living in Ontario and B.C. can afford to avoid mortgage insurance, they probably will. There could also be a lot of people in these provinces who “would just be moving up from an existing property,” says Taylor. “They probably got the equity from an initial purchase to assist with the down payment that will help them climb up the proverbial property ladder.”
There’s also the fact that the savings rate in Canada is up since the pandemic began. According to Statistics Canada, the household savings rate reached 7.6% of disposable income in the first quarter of the year, and surged to 28.2% in the second quarter — the highest savings rate since the 1960s. “All of a sudden people could be saving an extra few thousand dollars a month that’s going toward their down payment,” says Stillman.
How did COVID-19 affect the mortgage stress test?
Two somewhat contradictory things happened this year with respect to COVID-19 and the mortgage stress test.
First, we saw three cuts to the Bank of Canada’s qualifying stress test rate, which is the interest rate at which borrowers must prove they can financially handle a mortgage (that, or their bank’s posted rate). We saw the rate lowered once in mid-March, from 5.19% to 5.04%, once in May, to 4.94%, and again in August, to 4.79%, where it currently sits. This makes it easier — in one way — for homebuyers to pass the stress test.
But then, on July 1, in direct response to the pandemic, stricter stress test rules from Canada Mortgage Housing Corporate (CMHC) took effect. Suddenly, borrowers needed a higher credit score of 680 (for at least one borrower) to pass the test, as well as lower gross and total debt service ratios than previously required, and they had to prove that their down payment was not coming from an unsecured borrowing source.
So while the July 1 rules have tightened borrowing, the decreases to the qualifying rate have made it easier to pass the test. Where does that leave borrowers?
“The stress test rule changes have had no real effect on people during COVID because even though CMHC changed the rules, the other insurance companies did not change the requirements,” says Stillman. “So it was really a red herring.”
Zlatkin agrees. “If somebody doesn't pass the stress test with CMHC, then we can always try and put them with a different insurer,” she says, adding that the biggest barrier to entry for first-time home buyers is not the stress test — it’s income.
In fact, Stillman finds that the stress test is one of the furthest things from homebuyers’ minds when they go to buy a home. “Most people don’t even have the stress test in mind when they go to fill out mortgage forms,” he says. They’re simply thinking about how much money they have for a down payment, and what they can afford based on that.