It’ll be hard to top the anticipation borrowers felt going into last year, a year that gave us one of the biggest mortgage rule changes of all time – the new “stress test” – and a three-quarter-point hike to prime rate.
But 2019 won’t be without its own mortgage drama. Here’s what the stars are telling us about what’s to come in next year’s mortgage market.
Rotation into variable rates
A yield curve near inversion, plunging oil prices, increasingly dovish central bankers, a vulnerable stock market. Take your pick because clues of economic weakness are mounting. That’s trimming odds that the Bank of Canada will reach its previously estimated 2.5-per-cent to 3.5-per-cent neutral rate any time soon. These headlines and the three-quarter-point spread between five-year fixed rates and variable rates will give more people confidence to go variable in early 2019. Later in the year, as the gap between fixed and variable rates narrows, the old five-year fixed will regain some of its lustre.
As the 2019 election approaches, politicians will add mortgage accessibility to their campaign platforms. They’ll especially try to win the minds of first-time buyers, a key constituency that’s finding it harder than ever to get financing. If you want to wager on the outcome, bet on one of three policy tweaks in 2019:
- An upper limit on the interest rate used by lenders to stress-test borrowers;
- The return of 30-year amortizations for first-time buyers getting default-insured mortgages; or
- An exemption from the stress test for borrowers who want to switch lenders to get a better rate.
To recap, the stress-test rules introduced a year ago require home buyers with a down payment of 20 per cent or more to make sure they can afford mortgage payments at the greater of: the Bank of Canada’s five-year benchmark rate or the actual rate being offered plus two percentage points. Anyone with insured mortgages – those making a down payment of less than 20 per cent – must qualify at the greater of: the same Bank of Canada benchmark rate or the actual rate offered by your lender (without adding the extra two percentage points).
In-branch mortgage sales decline
Today’s mortgage shoppers demand fast, intelligent advice without the sales pitch. They also want the lowest possible rates. And lenders could offer both – if they didn’t have to maintain their large commission-based sales forces. In 2019, we’ll see more lenders lowering their costs by cutting out the middlemen (a.k.a. “mortgage specialists”) and replacing call-centre reps (often no more than lightly trained customer-service agents) with salaried mortgage experts. Case in point are HSBC Canada’s new, no-commission telephone mortgage advisers, who average far more mortgage experience (10 years) than a typical call-centre rep. By the end of 2019, trips to a bank branch for mortgage advice will start going out of fashion. Lenders will rush to revamp their call centres and add website automation and video chat, all in an effort to entice savvy online borrowers – borrowers who are increasingly willing to trade face-to-face service for another 10 basis points off their rate. (A basis point is one-100th of a percentage point.)
Tougher rules for HELOC holders
Got a home equity line of credit and want a new mortgage on another property? Canada’s two biggest lenders – Royal Bank of Canada and Toronto-Dominion Bank – now assume that you’ll max out that HELOC when they evaluate your mortgage application. That’s how they assess whether you can afford a new mortgage, in addition to the one you already have, even though you may not have borrowed a single penny from that credit line. The banking regulator thinks that’s prudent, and if my hunch is right, it’ll persuade other lenders to do the same in 2019. The net effect: People with existing HELOCs will qualify for fewer/smaller mortgages, putting a small dent in sales of second homes, rental units and vacation properties, among other outcomes.
Self-serve mortgage advice
In 2019 we will witness the emergence of mortgage bots in Canada. These chat bots, as they are known, will serve up instant automated answers to your mortgage questions. And they’ll do it with no sales pressure. If you really want to talk to a person the bot will transfer you to a human adviser, but in time bots will get smarter and replace most front-line mortgage agents. That’ll cost jobs for some in the industry this year and cut costs for lenders. Some lenders may pass through this saving to customers by way of lower rates, but we’re talking just one or two basis points here, about 10 Big Macs a year in interest savings.