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Residential mortgage debt in Canada totalled $2.14 trillion as of August this year, up by 3.4% compared with the same month in 2022 as the value of uninsured mortgages outstanding saw a sizeable increase.

Canada Mortgage and Housing Corporation (CMHC), the national housing agency, said in the latest edition of its Residential Mortgage Industry Report – released Thursday – that the value of uninsured mortgages issued by non-bank lenders crept up by 9% year over year, while 73% of outstanding residential mortgages issued by chartered banks were uninsured in the second quarter of 2023.

That trend arrived despite a slowing overall mortgage market, with growth in the first eight months of the year declining over the same period in 2022 as homebuying activity continued to cool.

Borrowers turning away from one- to two-year fixed-rate mortgages

CMHC said a noted shift in borrower preferences toward fixed-rate mortgages and away from variable products had continued to gather pace, with federally regulated institutions issuing $244.5 billion worth of new and renewed fixed-rate mortgages between January and August, compared with just $20.1 billion in variable-rate options.

The recent trend that saw many Canadians gravitate towards shorter-term fixed-rate mortgages of one or two years in anticipation of a potential interest rate cut down the line also appears to be reversing. CMHC’s report said borrowers were now increasingly opting for fixed-rate agreements of between three and five years, “indicating that hopes for an immediate decrease in interest rates have faded.”

Alternative lending space growth continuing, but moderating

The rise of Canada’s alternative lending space, meanwhile, is continuing – although CMHC noted that its pace of growth for the first three months of the year was much milder than previous quarters.

The country’s top 25 mortgage investment corporations (MICs) saw their assets under management increase by 7.1% in Q1, the first time in six consecutive quarters that that measure has not risen by double digits on a year-over-year basis.

The risk profile of the segment also increased slightly compared to 2022, the Crown corporation said, but its risk level remains “relatively low” compared to the years prior to the COVID-19 pandemic.

CMHC indicated that alternative lenders could see capital availability diminish in the coming quarters as investors turn their attention towards other lucrative investments, “with less or no exposure to our housing markets.”

Mortgage arrears continued to rise for non-bank lenders and mortgage investment entities but stayed stable for chartered banks and credit unions. While those rates have not risen dramatically compared with the years before 2020, CMHC nonetheless said recent increases “suggest continuous monitoring is necessary.”

Longer amortizations, slowing activity evident in traditional space

Among traditional lenders, purchase and refinance activity slowed noticeably. Chartered banks saw a 44% drop in the issuance of mortgages to buy a home, while refinances dropped by 34% compared with the same period in 2022.

That decline in purchase activity unsurprisingly arose as a result of a milder housing market, while CMHC said refinances had waned because of higher rates and stationary home prices reducing available equity.

The growing trend of longer mortgage amortizations was reflected by CMHC figures that showed almost two out of every three newly extended mortgages issued by chartered banks had an amortization of more than 25 years, a sharp increase from just half in 2020.

That said, in the traditional lending segment, mortgages’ overall risk profile remains “relatively unchanged” this year compared with 2022, CMHC said.

Source: Canadian Mortgage Professional