First National Financial LP

Market Memo: Mortgage Market, Changing Tastes – May ‘23

  • First National Financial LP

Rising interest rates and reduced affordability have led to some marked changed in the home buying and mortgage markets.  The latest Residential Mortgage Industry Report from the Canada Mortgage and Housing Corporation shows: a trend toward variable rate mortgages has ended, the classic 5-year fixed-rate mortgage has fallen from favour and a move toward alternative lending is on the rise.

Borrowers Exercise Their Alternatives

CMHC reports that mortgage activity at non-bank lenders accelerated into the third-quarter of 2022 and now matches mortgage growth in the banking industry.

“While overall mortgage debt in Canada grew by close to 6% in 2022Q3 (year-over-year), the assets under management of the top 25 mortgage investment corporations (MICs) in Canada grew by more than 24%,” CMHC says in its report.

The use of alternative lenders has, generally, been seen as a temporary measure, before a borrower moves to conventional lenders.  But the housing agency’s report shows more borrowers are now staying in the alternative space for their renewals. 

In the fourth-quarter of 2022 the share of mortgages that were renewed with the same or another alternative lender grew to 35%, compared to 28% at the start of the year.

Alternatives May Be Diminishing

Like conventional lenders, though, the alternative finance sector has become more cautious and loan requirements have tightened.  CMHC suggests, that the investors who provide the capital for alternative lending may be looking for other high-return places to put their money, away from the uncertainties of the housing market.

Changing Tastes

Borrowers who remain with conventional lenders have changed their loan preferences.  A trend toward variable rate mortgages that developed during the ultra-low interest rate days of the pandemic has reversed.  Since last June, federally regulated financial institutions have lent more funds for new and renewed mortgages under fixed-rate agreements than variable-rate agreements, which marks a return to pre-pandemic borrowing practices. 

As of the beginning of this year variable rate mortgages were still slightly more popular than the classic 5-year fixed-rate mortgage, but that popularity was declining faster than for the 5-year-fixed. 

Preference for Shorter Terms

Currently, the demand for variable and 5-year-fixed mortgages is being outpaced by shorter term loans.  Terms of 1 to 3 years for new and renewing mortgages are most popular right now, making up about one-third of the market.  At the beginning of the pandemic, they claimed a share of about 10%.  Terms of 3 to 5-years-or-less have climbed back to pre-pandemic levels and now account for a little less than 30% of the market.

This appears to be a sign that borrowers are paying attention to economic forecasts that are calling for a return to low inflation and a drop in interest rates in the foreseeable future.