08 Dec 2020 Private Mortgages
COVID-19 and the Canadian Private Mortgage Market
There’s no way around it – COVID-19 has been the defining event of this decade, thus far. The disease, unknown to most of the world even through the month of January this year, quickly came to dominate the world’s attention, and forced policy makers to respond quickly and decisively. Here in Canada, amidst many useful measures undertaken by various levels of government, the federal level worked with the Big-6 Banks at the outset of the pandemic to install a mortgage deferral program. This program enabled most Canadians to postpone their mortgage payments by up to 6 months to get some cash flow relief during a severe economic downturn that saw mass unemployment emerge, almost overnight.
The impact of COVID-19 on the Private Mortgage market
Here at Rateco.ca, we specialize in helping clients who can not get funded at the Big Banks, and work with a multitude of alternative and private lenders. It was unclear to us, back in March, exactly what impact COVID would have on the private market. As the pandemic first emerged, we saw a major shift in the willingness of many private lenders to continue to lend, for a variety of reasons. While lenders in this category are typically most interested in the value of the property they’re securing the loan against, when this value is unstable, as was the case early in the pandemic when legitimate fears of an impending crash in house prices were pervasive, mortgage lending tends to dry up very quickly, and this was certainly the case here in Canada. Even in situations where loans could have been arranged, these loans are based on physical appraisals of the property, and as appraisers were not even allowed to enter someone’s home during the lockdown, lenders could not gain any comfort around valuations, and alternative lending quickly ground to a halt. As the number of lender options available to borrowers crashed, the cost of private funding increased significantly while demand was still high.
The Deep Freeze – the Mortgage Deferral Program
This situation became even more dynamic as the federal government introduced and, working with the big banks, rolled out a mortgage deferral program that enabled borrowers to pause their mortgage payments for 6 months. The impacts of this deferral program on the mortgage market were profound. As a sort of ‘release valve’ on cash flow pressures, many consumers that had previously seen private and other alternative lending as a useful means of securing financing for new purchases or to get around their distressed credit, now punted their lending needs out until after the deferral program came to an end. The savings rate skyrocketed across the country, and for the first time in decades, the national level of indebtedness relative to incomes fell, precipitously, across the country. The various measures instituted by the government to bring stability to the economy paid off, of course – as the summer unfolded, unemployment slowly began to fall and the stock market rebounded sharply. The housing market did fall in rent-driven markets but soared in many others, driven by ultra-low interest rates. All of this caused lenders to flock back to the market to begin to lend again.
After the Mortgage Deferral Program – How Has the Market Fared?
With the program behind us and with banks and government officials clearly indicating a reluctance to run a similar program again, the market is slowly returning to normal. Interestingly, we have found borrowers continue to be somewhat slow to act; today, many of the scenarios we’re actively helping our clients tackle involve opportunistic investing (in real estate, and the stock market), seeking to take advantage of low interest rates. Prior to COVID, Rateco worked with many borrowers to help them withdraw equity from their homes in order to cover major life expenses such as weddings, vacations or renovations; as many of these large purchases can not be undertaken today, demand for alternative lending remains depressed nationally. With demand down and supply up, we continue to see unique low-rate opportunities in the alternative and private lending markets, and many of our most recent clients have been very, very pleased!