Q1 2023 - Canadian Mortgage Market

Q1 2023: Canadian Mortgage Market

Introduction.

Welcome to DV Capital’s Q1 2023 – Canadian Mortgage Market insights. For Canadian mortgage borrowers that purchased or refinanced their home at the 2022 market peak, particularly borrowers with a variable rate mortgage or that obtained short-term financing from an alternative or private mortgage lender with the game plan of converting to a traditional mortgage product in the near future, it is safe to say that a portion of this borrower segment is feeling turbulence.

Variable Rate Mortgages.

Borrowers that opted for a variable rate mortgage, which at one point had a lower mortgage rate than a fixed rate mortgage, perceived this as an advantage to maximize their borrowing and qualification potential. Others believed in the historic performance of variable rates compared to fixed-rate mortgages. Many borrowers were blind-sighted by mupltiple recent rounds of arguably unanticipated prime rate hikes. In some cases, borrowers with adjustable-rate mortgages are experiencing hundreds to thousands of dollars in monthly mortgage payment increases depending on their mortgage balance(s). Many borrowers with static-variable rate mortgages have received notice from their mortgage lender that they have reached the trigger rate meaning their mortgages have effectively converted to negative amortizations. In many cases, triggered borrowers have received the aid of extended amortizations, in some cases upwards of 70 years, which raises the question of how sustainable this band-aid solution will be in the long run – arguably a positive short-term solution if this prevents mass mortgage defaults.

Alternative 'B Lender' Mortgages.

For alternative and private mortgage borrowers who purchased or refinanced at market peak to access home equity or enter a heated real estate market with lower interest rates than they are today, there are multiple layers of issues that this borrower segment is facing. These short-term mortgage products are a stepping-stone to graduate to traditional financing. Many borrowers have found that the hurdle to do so has naturally increased due to an increasing interest rate environment. Borrowers who have made orderly mortgage payments during their mortgage term have received renewal offers at much higher interest rates. In some cases, many are unable to convert their mortgage to a traditional mortgage product as initially planned and fear that they cannot afford the mortgage renewal payments and are opting to list and sell their property; depending on the property location, there may be a value decline from the purchase price which can result in little to no net-equity, especially once factoring in purchase and sale transactional costs.

Private Mortgages.

Similarly, in the case of private mortgages, we have witnessed an abundance of non-renewals. In many cases, private mortgage investors or mortgage investment entities feel that the loans they funded at market peak are no longer as secure in today’s real estate environment. Depending on the property location and the difference between the loan to value from loan inception and now, there are handfuls of un-refinance-able mortgages. Private mortgage lenders in these situations must decide whether they commence legal proceedings that may result in some degree of loss or enter into an arrangement with their borrowers to extend the mortgage in hopes of riding out the storm.

Simply, in the absense of a rising real estate market, lenders are scrutinizing active mortgages and contemplated fundings with a fine-tooth comb, rightfully so, which is naturally resulting in fewer options for private mortgage borrowers, particularly the high-leveraged, some of whom may not have been able to maintain homeownership for this long withour year-over-year equity appreciation and are now facing the previously disregarded option of listing and selling their home, which as previously mentioned, may net insufficient proceeds to downsize or rent.

In Summary.

Interestingly, some private mortgage lenders are slowly increasing their lending aggression and disarming recently implemented underwriting policies. Where this is a sign that private lenders believe that the real estate market is re-stabilizing or confirmation that non-bank lending continues to fill market voids, it is very much clear that a segment of homeowners are and will be facing more resistance in this present market. Time will tell how the remainder of the 2023 Canadian real estate and mortgage lending market will play-out. Thank you for taking the time to read DV Capital’s Q1 2023 – Canadian Mortgage Market insights.