What's top of mind for mortgage lenders in the current market?

CEO on navigating an ever-changing environment

What's top of mind for mortgage lenders in the current market?

Canada’s unemployment rate continues to hover near historic lows in a trend that mortgage lenders are watching closely as a leading indicator of future risk in the market.

The rate of unemployment has now remained unchanged at 5.0% for five consecutive months, Statistics Canada’s latest labour market figures revealed, marginally above its record low of 4.9% last summer.

That’s significant, according to Radius Financial chief executive officer Ron Swift (pictured) because the strength of the labour market usually correlates closely with borrowers’ ability to meet their financial obligations.

He told Canadian Mortgage Professional that current figures were encouraging, although the market’s ongoing volatility is likely to see mortgages in arrears and defaults rise slightly over the coming months.

“As a lender, probably one of the biggest things that we watch for is employment and unemployment, because that’s the one that seems to really drive the performance of our portfolios,” he said.

“Right now, things are still looking very strong and positive, and as a result our arrears rates [and] default rates are remaining at pretty much historic lows, and we’ve only seen some minor increases in some defaults. [That’s] not to say that I expect there won’t be more, because I think there will be more coming.”

Swift said the numbers would probably increase as borrowers start to renewal their mortgages at higher rates, although the relatively calm waters at present were a good sign after a series of rapid rate hikes. “At this point, it looks like consumers are still managing the increased payments and things that they’re experiencing,” he said. “They’re holding through.”

What else are lenders focusing on?

Regulatory trends are also being closely monitored by lenders, Swift said, as well as shifts in consumer behaviour depending on their homebuying and borrowing preferences. One of the most striking changes in recent times has been a big swing in the popularity of fixed-rate options, with borrowers increasingly turning away from variable-rate mortgages after a series of Bank of Canada hikes.

“Last year as a company, 80% of our business was variable-rate,” he said. “This year, two out of three loans are fixed. We have a lot more of our business into the mid-terms: the two- and three- and four-year fixed-rate terms that we don’t historically see.”

That trend, one that’s been widely reported in recent months, has emerged as many borrowers seek to protect themselves against further short-term increases in their monthly payments while also keeping an eye on the possibility that mortgage rates will be lower again two or three years down the line.

Swift said Radius has been attuned to that shift toward shorter terms, and had also been focused on liaising with broker customers on current market trends to make the relationship as productive as possible.

“As a result of that, we’ve now decided to hire a couple of folks, put them out on the road to spend more time with our broker customers for education and trying to help our brokers navigate what’s going on in the marketplace by being there more with the physical versus the virtual presence,” he said.

“We’ve done that, we’ve started to hire both east and west, to have more people on the street to connect with our brokers and help them.”

Inflation remains a top concern

Unsurprisingly, inflation is also featuring heavily on lenders’ radar, with the Bank of Canada’s bid to bring down annual price growth the central reason behind its aggressive rate-hiking policy of the past year.

At last reading, Canada’s annual rate of inflation stood at 4.3%, having fallen considerably from its 8.1% peak of last June. The central bank expects inflation to reach about 3% by the summer, before falling further – back to its target rate of 2% – in 2024.

“There are some days where it looks like we’re going to be truly onto a soft landing in relative terms,” Swift said. “Hopefully late this year or next year, we’ll start to see some inflation down to the levels where the Bank’s going to feel comfortable to start lowering rates. That’s our general feeling right now.”

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