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Canada’s biggest banks are facing a year of slumping mortgage growth as high interest rates knock borrowers off the list of those that qualify for the loans at traditional lenders.

Real estate lending rose 8 per cent in the year ended Oct. 31, 2022, breaking the trend of double-digit growth in 2020 and 2021 when historically low rates spurred homebuyers and bolstered bank earnings.

As hot inflation pushes up interest rates and continues to cool Canada’s housing market, analysts expect mortgage growth to dip further this year.

“We expect mortgage loan growth to further decline to low- to mid-single digit year-over-year growth in 2023 reflecting lower home sales and home prices as a result of higher mortgage rates and weak housing affordability,” RBC Capital Market analyst Geoffrey Kwan said in a note to clients.

Canadian real estate secured lending makes up the bulk of lending across the Big Six banks, comprising 44 per cent of total loan books on average in the fourth quarter, according to research from investment bank Keefe, Bruyette & Woods (KBW). Mortgage portfolios carry a heftier weighting at some banks, ranging as high as 53 per cent at Canadian Imperial Bank of Commerce and as low as 33 per cent at Bank of Montreal.

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With interest rates more than doubling in a year, many Canadians no longer qualify for pricier mortgages. Lenders are required to stress test borrowers to determine whether they can sustain payments at higher interest rates. That pressure is weighing on homebuying.

Sales volume has spiralled lower, with activity in the Toronto and Vancouver regions plunging 45 per cent and 55 per cent year-over-year respectively in January. Economists broadly expect that the Bank of Canada will hold off on rate cuts until the end of 2023 at the earliest, suggesting that mortgage headwinds won’t ease until next year, according to KBW analyst Mike Rizvanovic.

“For the Canadian banks under our coverage we expect that to directly result in rapidly decelerating mortgage growth over the next several quarters, with potentially flat balances later in [fiscal year] 2023,” Mr. Rizvanovic said in a note to clients.

Lending to home hunters may become even more difficult as Canada’s banking regulator proposes tighter rules that would make it harder for borrowers to get a mortgage. The Office of the Superintendent of Financial Institutions (OSFI) in January unveiled three proposals that would tighten underwriting rules for federally regulated banks, including bolstering the mortgage stress test for risky loans and capping the share of highly leveraged borrowers a bank can have on its mortgage book.

Between higher rates and tighter approval requirements, the number of people qualifying for mortgages at traditional lenders has plummeted from a year ago, according to Frances Hinojosa, a mortgage broker and co-founder and chief executive of Tribe Financial Group. The pressure is pushing prospective borrowers and those renewing their mortgages to subprime and private lenders with looser lending requirements.

With slower activity and heated competition for a smaller pool of applicants that qualify for mortgages at the Big Six banks, brokers have noticed that larger lenders have been much quicker at processing applications and responding to requests than in recent years.

“When you submit a deal to a prime lender, the response time is so superfast compared to what we saw in the past two years,” Ms. Hinojosa said in an interview. “And that truly is indicative of the volumes that they’re receiving today.”

But as homebuyers continue to navigate a housing shortage while Canada ramps up the number of newcomers entering the country, a softer year ahead could be a blip before activity picks up again.

The Bank of Canada signalled that it plans to pause on further rate hikes, and Canada added 150,000 jobs in January, 10 times the number estimated by financial analysts. Households are also sitting on more savings than they were before the pandemic, and arrears – or mortgage loans with payments overdue by more than 90 days – have so far held steady, suggesting that the chances of the loans turning sour are low.

Meanwhile, banks have been searching for ways to retain and attract customers as they adjust to higher rates. As mortgages come up for renewal in a higher inflation and interest-rate environment, borrowers could face higher payments than some may be unable to afford. More customers are taking on mortgages with amortization periods longer than 30 years to help absorb higher payments.

Customers are also locking in fixed terms for shorter periods as they ride out the elevated rates expected over the next few years, according to CIBC.

“We’re proactively reaching out to clients in advance of renewal to ensure they understand all their options, as this is a different rate environment and it’s important that homeowners consider their total financial picture,” CIBC executive vice-president of banking centres Peter Lee said in an e-mail.

“In the current rate environment, we’re seeing increased interest in 2 and 3 year fixed-term mortgages, which gives clients the certainty of fixed interest costs for the near term and a chance to evaluate their options in the not-too-distant future.”