Mortgage Market Outlook for 2020
January 23, 2020
Mortgage Market Outlook for 2020 – In 2019, Canada’s mortgage market caught the attention of many individuals. From the lowering of interest rates to the end of year increase in mortgage growth to the growing influence of online discount mortgage lenders, it was an eventful year.
Looking ahead to 2020, here is what you could expect from Canada’s mortgage market.
Lenders are finally realizing how competitive they have to be to win online borrowers as 2019 saw a new level of online-mortgage competition. The spread between typical deep-discounted five-year fixed rates and Canada’s five-year swap rate* shrank to a record low. Expect 2020 to be even more competitive as brand new, digitally focused direct-to-consumer mortgage lenders enter the market.
MORE TRANSPARENT BANKS
The Bank of Nova Scotia deviated from its big-bank peers in 2019, by advertising for the first time online, its best mortgage rates. Scotiabank’s eHome online mortgage application featured rates that most banks would not go near. Customers took notice, with more than 100,000 borrowers trying eHome this year. The “digital mortgage” race will only heat up in 2020, as the rest of the big six banks will likely all roll out enhanced mortgage websites. Not all banks will advertise such highly competitive rates, but a few might and that will be enough to drive rate competition even further.
“INSTANT MORTGAGE APPROVALS” THAT ARE NOT SO INSTANT
An advertising trend of mortgage lenders and brokers offering “instant mortgage approvals” will be something to watch for in 2020. In Canada, instant mortgage approvals are not truly instant. This is because Canada does not have the technology (yet) to automatically validate income, employment and down payment electronically. Those “instant approvals” will be conditional, as the lender must still manually review the documents, and in some cases, send out physical appraisers to the property.
THE FIXED-VARIABLE GAP WILL CLOSE
The unusual fact that five-year fixed rates have been selling for less than variable rates will end in 2020, for a little while. Currently, the average five-year fixed rate is about 15 basis points (0.15%) below the average five-year variable rate. During that time borrowers will be motivated to shit from five-year fixed to variable-rate mortgages. Over the long term, the fixed-variable gap will stay narrower than it has been in the past and go below the variable rates more frequently.
Other possible changes to the mortgage landscape in 2020:
- A stress test exemption could be implemented by regulators for people switching lenders and/or the minimum qualifying rate for the stress test could be changed.
- It could get easier to qualify for the federal government’s First Time Home Buyer Incentive program in Toronto.
- There could be an increase in the number of people using provincially regulated credit unions to get around the federal mortgage stress test.
- The national average home price could grow closer to 6.2%, as forecasted by the Canadian Real Estate Association, versus the 3% forecasted by analysts. This increase could make affordability a concern.
On Wednesday, January 22 the Bank of Canada held its key policy rate at 1.75%. The recent easing of global trade tensions is expected to support stronger growth as the year progresses. However, should the weaker economic growth that spilled into 2020 continue throughout the year, the Bank of Canada will consider a rate cut.
*Swap rate definition: For interest rate swaps, the Swap rate is the fixed rate that the swap “receiver” demands in exchange for the uncertainty of having to pay a short-term rate, e.g. 3 months LIBOR over time. Analogous to YTM for bonds, the swap rate is then the market’s quoted price for entering the swap in question.
Mortgage Market Outlook for 2020 written by Benczik Team Realty