The cost of servicing a mortgage is moving in the opposition direction to overall inflation. Is trouble ahead for the market?
Canada’s annual inflation rate is continuing to tick downwards, falling last month to its lowest level in more than two years – but mortgage interest costs are surging at an eyewatering pace.
While the consumer price index (CPI) is now within the Bank of Canada’s target range for inflation, hitting 2.8% in June, the cost of servicing a mortgage spiked by a huge 30.1% on a yearly basis during the same month.
That’s an unsurprising development, with the central bank having introduced a series of hefty interest rate hikes over the past 16 months that have ramped up borrowing costs for scores of homeowners across Canada.
The latest of those rate increases arrived last week in the form of a further 25-basis-point jump, meaning the Bank’s trendsetting interest rate is now at the 5% mark – a full 475 basis points higher than March 2022.
The potential impact of those climbing borrowing costs on the Canadian economy is not lost on most observers. In its latest review of the stability of Canada’s financial system, released in May, the central bank made 73 references to the mortgage market or the outlook for current mortgage holders.
Its tone was cautiously optimistic about the ability of homeowners to absorb higher interest rates, noting that while pockets of strain are emerging in the market, households generally “appear to be managing” in the present economic landscape.
Canada’s annual inflation rate plunged to 2.8% in June as gas prices continued to fall, bringing yearly price growth within the Bank of Canada’s target range of 1% to 3%.https://t.co/lhPJyBa8zf#breakingnews #inflation #mortgageindustry #economy— Canadian Mortgage Professional Magazine (@CMPmagazine) July 18, 2023
How much pressure is Canada’s mortgage market under?
Asked last week on the prospect of further stress in the mortgage market, James Laird (pictured top), co-CEO of the Ratehub.ca online brokerage, told Canadian Mortgage Professional that a wave of defaults was unlikely despite rising rates.
“I believe stress in households exists – that’s really the point, to strain households so they stop spending money. That’s what the Bank is trying to do,” he said. “But when I think about mortgage payments, I still come back to [this]: If there were two people with jobs when you first got your mortgage, do those same two people still have jobs?
“As long as no-one’s lost their job who was contributing to the mortgage, I still think the vast majority of households will be making their mortgage payments on time.”
Canada’s financial consumer watchdog has recently unveiled new guidelines to protect mortgage holders from the impact of rising rates, urging lenders to roll out support for customers struggling with higher payments.
The Financial Consumer Agency of Canada (FCAC) said that lending institutions should provide appropriate relief measures for that homeowner cohort, stopping short of recommending specific policies but indicating that waiving prepayment penalties, internal fees and costs, and extending amortization for a short period should all be considered.
Laird added that it’s also in the interest of lenders to come to an arrangement with borrowers rather than see payment struggles and possible defaults rise.
“The lender will always appreciate the borrower reaching out before they miss a payment,” he said. “The last thing the borrower should do is miss a payment without speaking to their lender, so they’ll appreciate that too.
“Just start off on a good foot, and then they’re going to listen to the situation and generally speaking if the lender can understand why the financial strain is temporary or how the household can get back on their feet, maybe this is a one-time expense.”
Lenders are “in the business of loaning money and collecting mortgage payments, not foreclosing,” Laird added, “so they’re going to work with a borrower who reaches out and explains the situation and how it could improve in the future.”
How are regulators responding to trends in the mortgage lending space?
Still, Canada’s banking regulator is also keeping a close eye on lender practices, with recently unveiled proposals aimed at encouraging financial institutions to reduce their number of negatively amortized mortgages.
The Office of the Superintendent of Financial Institutions (OSFI) announced proposed changes to capital requirements for lenders that would see them required to set aside more capital for loans whose payments cannot cover their interest.
Those measures, OSFI said, “should encourage banks to lessen the number of mortgages that would otherwise go into negative amortization.”
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