Mortgage rates weren't supposed to make record lows in 2015, not if you asked economists and the Bank of Canada two years ago. But they did. And despite all the chatter about the first U.S. rate hike since 2006, Canadian rates could do it again in 2016.
But interest rates won't be all that's changing in the coming 12 months. Here are four mortgage trends you need to watch in 2016.
More missed payments?
Seemingly every year the government throws new rules at the mortgage market, lending gets tighter and the housing market gets safer. But one thing Ottawa can't control is world economics. Despite manufacturing gains from a cheap loonie, global growth is slowing. That and plunging oil means more Canadians could be out of work, and when people lose jobs, people miss mortgage payments. Today, a mere 27 of every 10,000 mortgage borrowers are behind 90-plus days on their payments. While higher unemployment won't lead to an epic mortgage default spike in 2016, a 0.27-per-cent arrears rate may not be sustainable.
Lower rates offset higher rates
Barring a surprise economic rebound, mortgage rates could dip to fresh all-time lows in 2016. But they won't be as low as they could have been. That's because Ottawa is raising government guarantee fees and making banks hold more capital in case mortgages go bad. On top of that, investors are demanding higher returns to compensate for perceived risk. That will make it more expensive for lenders to sell mortgages to investors and to hold mortgages on their balance sheets. As usual, banks won't eat this cost. They'll pass it right along to Joe Borrower, who will pay as much as one-tenth of a percentage point more for a mortgage. That's as much as $1,400 more interest over five years on a $300,000 mortgage.
Hot and cold housing markets persist
The national average home price just hit another record, but take Ontario and British Columbia out of the mix and prices were actually down 4.7 per cent versus last year. Canada has a two-temperature market depending on the geography. Expect higher down payment requirements to put barely a dent in white-hot Toronto and Vancouver, while weaker markets will see a noticeable dip in higher-end home sales. If you're refinancing in these weaker markets, expect more conservative appraisals in 2016, especially on homes over $500,000.
A mini private lending renaissance
Government mortgage tightening has made banks pickier about who they lend to, a boon for lenders who specialize in riskier borrowers. Private lenders, in particular, could have a big year. Most notably, they'll have more money to lend as new regulations make it easier for private mortgage investment corporations to raise capital. This means more competition for borrowers who can't qualify at a bank, pushing down private lending rates and raising the amount private lenders will lend, relative to home values. It'll also encourage more bundling. That's where you get a regular mortgage for 75 per cent to 80 per cent of your home value and add a second mortgage for up to 90 per cent, all without the need for default insurance (which is normally required when your equity is less than 20 per cent). Concerned policy-makers will watch this so-called "shadow lending" activity with eagle eyes in 2016.