How COVID-19 is impacting mortgage payments, mortgage rates and the housing market

First, and foremost – I hope this email finds you well and that you and your family are keeping safe during these difficult times. Despite these challenges, I’m optimistic that, through working together we can help minimize the impact of the virus, and do our best to ensure we all come out of this in the best position possible for future success. I write this email to try and provide some clarity around your financial options as they relate to your home, and where things might be going in the coming months.

I’m going to do my best to lay out options as they are now, but keep in mind things are changing at a rapid pace so if you have questions please reach out and I’ll do my best to provide current information based on your situation, and explore all the options you might have to assist with any financial impacts you might be experiencing.

Below I will go into detail about options you have for managing your mortgage payments during this time, as well as my thoughts on the impact COVID-19 is having and will have on the mortgage market and mortgage rates and the housing market.

Managing your mortgage payments

As the economic impact of the outbreak is becoming more of a reality here in Canada, many lenders are starting to roll out announcements of the option to defer mortgage payments for up to 6 months. This would mean that you could look to put your mortgage on hold for up to 6 months, and then pick things back up where you left off. Here is what we know so far…

For those with an insured mortgage (meaning you put less than 20% down on the purchase of your home), the insurers have announced that they are allowing borrowers to defer their mortgage payment by up to 6 months. The process will be to discuss this option with your lender, who will have to collect details pertaining to your request to determine your current financial situation, how long the problem is likely to last, and determine when regular payments can be resumed. Then they must open a case with the insurer to implement the strategy. Each situation is evaluated on a case by case basis, and a suitable strategy will be determined to meet your needs.

The big 6 banks have also announced today that they will be assisting borrowers experiencing financial difficulties due to COVID-19 outbreak. The details of how they will assist borrowers isn’t yet clear, however, it’s likely to look something similar to what the insurers have implemented with an option to defer payments for up to 6 months, based on your personal financial impact and timeline to being able to resolve the situation. Again, each situation is evaluated on a case by case basis, and a suitable strategy will be determined to meet your needs.

The non-bank lenders have started to roll out their announcements as I write this, and will likely look to match the scenarios above, evaluating each case, and providing solutions to meet your needs.

Most lenders have policies in place to allow for a skip or miss a payment option that can be explored outside of these situational specific solutions outlined above. Beyond that, if there is no employment impact currently, but you think there will be economic impact we can look to rework your mortgage through a refinance, pull out funds to cover you in this time of need or extend your amortization in order to reduce the monthly burden of the mortgage payment.

The landscape of information and options available are changing rapidly, so if you have any questions feel free to reach out by email, or book a call with me below.

Impact on mortgage rates and lending market

Over the past few months we’ve seen interest rates dropping, as the market anticipated the impact of the outbreak on our economy. Now that we are seeing some of the impacts of this in reality, it has begun to change lenders outlook on the market.

Fixed rates…
This week we’ve seen fixed mortgage rates starting to increase. As the economic impact of the outbreak becomes a reality, so does the risk of people being unable to manage their mortgage payments. Because lenders are expecting to experience more loss on their overall mortgage portfolio, they have started to increase rates on all mortgages to cover their losses on a few of them. We’ve seen rates increasing by 0.10 – 0.40% on 5 year fixed terms.

Bank of Canada drops prime rate, but lenders discount on variable rate mortgages are decreasing…
In the last two weeks the Bank of Canada has cut the rate that dictates the mortgage prime rate with banks by 1%. This is good news for anyone with a variable rate currently or anyone that has locked in on a variable rate up until last week, as the discounts were quite good. However, with the fear surrounding the economic outlook, lenders have started to decrease their discount on variables by 0.50% or more, with variable rates carrying discounts in the range of 0.75% – 0% to cover for any losses, and potentially future rate cuts by the Bank of Canada in the coming months.

The speculation is that the Bank of Canada will likely cut rates again by another 0.50% before or at their next scheduled meeting on April 15th. Stephen Poloz announced in at his press conference on March 18th, that he will wait to see the impact of the $82 billion fiscal aid before deciding on any future cuts.

Delay in the change to stress test…
Last month, the federal government announced that on April 6th they would be rolling out a change to the stress test to allow for a slightly more dynamic and favourable stress test for borrowers. With all the changes already happening as a result of the outbreak, this has been taken off the table for the foreseeable future. More on this as things develop.

Lending guidelines will tighten in recession…
As we move forward in the coming months, it’s clear that there will be a significant impact on our economy that could lead to an economic downturn lasting beyond the COVID-19 outbreak. In times of hardship, lenders tend to pull back on programs or tighten guidelines that would otherwise allow for higher borrowing capacity, especially for borrowers that don’t fit inside typical lending boxes. We may see these programs start to disappear or change, so if you are in this group of borrowers and considering any mortgage changes, or just starting the process it might be something worth investigating further over the next few weeks.

Impact on the housing market

While it’s not yet clear what the impact will be on our economy, and in turn on our housing market – there are a few things we can identify as potential impacts…

Buy/Sell transactions are going to slow…
With the economic uncertainty and the implementation of social distancing, sellers are less keen to have traffic through their homes, and both buyers and sellers will be less motivated to make on all that’s involved in moving. As a result, it’s clear that over the next weeks or months we are going to see a slowdown in sales of real estate. Many will want to see how things play out before considering a sale or purchase of a home, and so a quieter than usual spring market seems more than likely.

Impacts on demand…
The impact on the economy is going to have effects on a few factors that impact the demand for homes.

We’ve already seen financial markets taking big hits, which may impact people’s down payment savings. As a result, we may see buying power decreased over the next few months.

The impact on job stability and income over the next few months is yet to be clear. If there is a significant amount of job loss or a long duration of off-work time this will certainly impact demand. Savings will be diverted from down payment to cover expenses in the meantime, and the ability to qualify for a mortgage could change for many. Both of these situations have the potential to negatively impact demand, and slow the housing market.

On the flip side, strong historical housing demand in the Toronto region could bode well for the city to be a national leader in rebounding from this downturn. Those previously priced out fo the Toronto market may re-enter, subsequently pushing prices higher. We may also see a growth in housing demand on a broader country basis, as the world continues to evaluate Canada’s response (and capacity of its health care system) relative to other countries.

Impacts on supply…
As discussed above, we are likely to see a slow down in the market in the short term; however, the real question is where does supply goes in the medium- to long-term. Is there an increased need to sell homes and downsize to consolidate debt? Do we see an influx of listings due to a higher level of defaults? Does a higher-than-expected level of supply surface from everyone that held off selling while the conditions weren’t ideal? If these scenarios result in a substantial increase in supply, we could see a negative impact on the housing market.

It is important to remember, however, that we have been living in a supply constrained market in the GTA for years, and January and February of 2020 really exposed this issue. It is not yet clear whether supply will increase enough to finally satisfy the seemingly insatiable demand of the market in the GTA.

Only time will tell how the market reacts, and how much of an impact there is on our economy which in turn will dictate the nature fo the impact on the housing market. If you have questions, please feel free to reach out or book a call with me below.