Time to lock in? The outlook for mortgages in 2021

If you’re in the predictions business, 2020 was humbling.

You probably haven’t met anyone who forecast a global contagion, 13.7 per cent unemployment and a border shutdown.

But even for those prescient enough to foretell any of this, few would have imagined home prices would still be setting records and mortgage growth would still be normal.

If prognosticators are right about 2021, it’ll be a major comeback year. So, for those of you who need a mortgage in the next 12 months, I share five humble prophecies about the year ahead.

NO RATE HIKES IN 2021 (BUT BEWARE 2022)
If you believe the Bank of Canada, the prime rate won’t climb until 2023. The bank may even have to consider a cut of 10 to 15 basis points in 2021 if the latest lockdown stalls the recovery. (There are 100 basis points in a percentage point.) The real story, though, is the vaccine-led comeback. Economists are getting more optimistic about it and are starting to move forward their rate hike estimates from 2023 to 2022. Historically, the Bank of Canada starts hiking rates within one to two years of the overnight rate hitting bottom. And with record fiscal stimulus, record consumer saving, record low mortgage rates, record housing prices, record stock prices, pent-up demand from consumers and COVID-related supply constraints, this time should be no different. For those of you with variable mortgage rates, it’s likely you won’t have to worry about hikes until the following year.

THE YEAR OF THE FIXED
Variable rates will save mortgagors more money than any other term in early 2021, right before they give way to fixed rates. Fixed mortgage rates follow government bond yields. Bond yields reflect economic expectations over the next one to two years. So, if traders think the inflation outlook warrants a rate hike in 2022, they’ll price it in during 2021. As I write, some economists – such as Carlos Capistran, head of Canada and Mexico economics at Bank of America – now project annualized inflation “close to 3 per cent” in 2021. Higher than expected inflation expectations and a tapering of the Bank of Canada’s bond buying should lift fixed rates at some point next year. My wager: Borrowers will come to fear that and lock in, in droves.

MORTGAGE DEFAULTS WILL REACH A LONG-TERM HIGH
It’s been estimated that mortgage arrears could leap as high as 0.95 per cent in 2021 after the end of payment deferrals. No doubt, a bigger-than-normal number of unemployed and underemployed homeowners won’t be able to carry their mortgages. But while arrears could easily double from the current 0.26 per cent in 2021, surpassing the 0.45-per-cent high of the global financial crisis, early indications suggest delinquencies near 1 per cent are not going to happen. Even 52 basis points of arrears wouldn’t be enough to cause mass forced sales and crashing home values.

FEWER BRANCH-SOLD MORTGAGES
Let’s face it, some people want face-to-face mortgage advice and that’s not going to change. But as much as banks try to “future-proof” their branches, the number of branches will steadily shrink, as it has since 2014. Branch traffic dove in 2020. Infection phobia accelerated an already-budding trend of people originating mortgages online and through call centres, compared with face to face. That trend will accelerate in 2021 as banks improve their online mortgage interfaces. The good news for consumers: The less human interaction there is, the more customers will view mortgages as a commodity and the more banks will have to compete on interest rates.

MORE RESORT TO NON-PRIME MORTGAGES
Millions of Canadians saw their incomes shrink during the pandemic. In fact, many two-income households became one-income households. For those folks, as well as families who accumulated significant debt during the pandemic, proving they have enough income to qualify for a mortgage will get tougher in 2021. That’s especially true for self-employed applicants who must show a two-year income track record. For these reasons, and thanks to incessant home price gains that increase people’s debt ratios, more borrowers will turn to higher-risk lenders to get approved. As a result, 2021 should be a record year for non-prime mortgages (though they will still be a minority of the market).

PARTING THOUGHTS
This year was as sombre as they come, but it had a silver lining for mortgage borrowers. The price of money has never been lower, mortgage competition has never been fiercer and if you’re a single-family homeowner, odds are you gained significant equity this year. Health and safety trump all of that, but you’ve got to take what you can get. Here’s to a much better 2021.

Source: The Globe and Mail