Economists take a closer look at mortgages refinanced with alternative lenders
The risk of heavily-indebted homeowners being forced to sell their homes is increasing in Canada, according to independent economic research business Capital Economics, which emphasized concern for mortgages being refinanced with non-bank lenders.
The firm said a large increase in the number of insured mortgages being refinanced with the help of non-bank lenders for the first time was a concern.
With homebuyers needing default insurance in Canada when their loan-to-value ratio is more than 80%, this often meant that their finances have already been stretched in order to purchase the home.
“These borrowers are therefore more likely to fall afoul of the stress tests when mortgage rates rise,” said Stephen Brown, Capital Economics’ deputy chief North America economist.
Brown stated that the rise in insured mortgages being refinanced with alternative lenders implied that many borrowers could not pass the stress tests with their original providers.
A continued struggle for refinancing
In the second quarter, there were 3,784 insured mortgages that were refinanced for the first time with alternative lenders. Non-bank lenders only took up 4.3% of refinancings.
Despite the numbers being small so far, Capital Economics said that it was likely that more homeowners with insured mortgage would face struggles in refinancing in the coming months. This was because they will be refinancing with rates that were much higher than it had been in 2022.
Home prices have declined by 10% since 2022 and homeowners who had less than 20% equity in their home could either have an above the loan-to value (LTV) limit of 95% or be in the negative.
The five-year fixed mortgage rates of near 6% also meant that the stress test rate was close to 8%.
“While non-bank lenders stepped in to help these borrowers earlier this year, they may [be] less inclined to do so now that falling house prices are further eroding borrowers’ equity and the economy has entered recession,” explained Brown.
A drop in home sales
As demand for housing cooled down, home sales were reportedly weakening across Canada based on the early results from local real estate boards for October that were released last week.
While being the biggest market in the country, Toronto’s home sales have sunken to levels seen during the past two recessions, according to economists with National Bank of Canada. Economists from RBC also found that home prices were starting to soften in Ontario and British Columbia with the MLS Home Price Index declining in Toronto, Vancouver, and Fraser Valley.
“We expect these trends to persist through the remainder of the fall season,” said RBC economists Robert Hogue and Rachel Battaglia.
“We think buyers will stay on the defensive in many parts of Canada despite more choice becoming available to them. High interest rates, ongoing affordability issues and a looming recession are poised to pose major obstacles,” they added.
