How Has COVID-19 Changed Mortgage Applications?
The homebuying procedure has been affected by COVID-19. Read this blog to know How Has COVID-19 Changed Mortgage Applications?
Source: Freepik
Did you know the Canadian economy has registered a negative GDP growth rate of (-) 7.1% during the Covid-19 pandemic, the first time since 2009, as per IMF’s country-wise GDP figures?
To combat the stressed financial situation, the Bank of Canada overnight rate was reduced by 50 bps thrice on 3/4/20, 3/16/20, and 3/27/20, from 1.75% to 0.25% to mitigate the COVID-19 impact on the Canadian economy.
The first question that might come to your mind could be “What was the pre-pandemic volume of mortgage application in the Canadian real estate market?”
The second question that might come to your mind could be “What is the application volume of the mortgage during the Covid-19 period in the present real estate market of Canada?”
And the third natural progression could be “is there a change in volume of application, and if yes, why?”
These three questions pretty much sum up the objective of this article.
The first two questions are inextricably linked and work for hands in gloves. Hence, we will address both questions concurrently.
The surge in mortgage borrowing during Covid-19
New mortgage lending increased significantly during the pandemic spurred by low borrowing costs and resilient housing demand. As per the report on applications for mortgage, borrowing increased, adding $108 billion in mortgage debt. This was less than $72 billion, two-third of 2020 volume, and under $46 billion in 2018.
Although COVID-19 caused stress on the existing mortgage loans, the new mortgage loan surpassed $42 billion in March 2020 on a seasonally adjusted basis.
We can attribute the recent surge in fresh mortgage applications in 2020-21 to various factors:
Historic low borrowing cost
This catapulted the surge of the new mortgage application for the purchase of properties, refinancing, and renewal of ongoing mortgages. Chartered bank mortgage lending witnessed a record high in 2020.
Resilient demand for housing
Because of the rise in Work from Home (WFH) a corporate culture, professionals preferred dedicated spaces to work at home. This led to increased demand for bigger or second homes where working professionals can fulfill their work responsibilities without getting entangled in interrupted by the household chores.
Government programs & initiatives
Canadian banks lowered interest rates to offset the impact of expected credit losses owing to Covid-19 disruptions. Bank of Canada reduced the overnight rate by 50 bps thrice on 3/4/20, 3/16/20, and 3/27/20. The reduction is to the tune of 50bps, from 1.75% to 0.25% to mitigate the COVID-19 impact on the Canadian economy. This caused increased lending that included the origination of new mortgages for the purchase of properties, refinancing, and renewal of existing mortgages.
Expected Credit Loss (ECL) estimation
Financial institutions engaged in mortgage lending estimated an impending default in their mortgage loan portfolios each quarter. The banks’ risk management planning feared that they may need to write off some of their mortgage loan portfolios in each quarter.
To prevent the risk of near-term mortgage default, the office of the Superintendent of Financial Institutions (OSFI) announced a special capital incentive for federally regulated deposit-taking institutions allowing payment deferral to their borrowers.
This prevented many borrowers from reclassifying loans as non-performing, preventing further credit loss. This boosted the sentiments of the economy and the prospects of applying for a new mortgage.
Although banks have experienced the ECL rising slowly from 2017 to 2019 and escalated during the Covid-19 pandemic, the ECL as a proportion of total household debt remained at 0.1 percent in the Q3 despite households deferred mortgage payments.
Early Mortgage Renewal Facility
Another key factor that contributed to a lower ECL is that the financial institutions allowed the borrowers to renewal ahead of the end of the term. Many borrowers took the advantage of the early renewal option offered by their banks and renewed mortgages several months before the end of the term, and even by the borrowers whose terms are expiring in the future.
Longer-term rate reduction induced by the variable-rate decline
As the interest rates reduced in March 2020, at the beginning of the pandemic, the demand for variable rate mortgage loans increased while longer-term rates remained largely the same initially. When the longer-term rate followed the fall in the variable rates, the demand for fresh mortgage loans for five-year fixed rates surged in the summer.
