Early last year about one-in-five mortgage borrowers were taking out equity from their homes. On an average they took a bit more than $40,000 off their homes for various reasons. Many went for a fresh new mortgage and some preferred to get a second mortgage or even a HELOC.
People are Watching:
Since last year the equity take out trend has changed noticeably. Last time CAAMP reported that about one-in-ten are now drawing equity from their assets. That is almost half compared to spring-2011.
This downward trend will continue in future. The equity takeout is about $45 billion per year – industry in Canada. A shortage of borrowers means surplus funds for the lenders. Recent rate wars are the tale-tell signs of that fact.
Government Warnings and Tightening:
Each and every financial authorities in Canada have been issuing warnings against the concept of borrowing against the home equity. Canadian borrowers are intelligent enough to react to those warnings. It took them some time but they are catching up in cleaning their financial house.
OSFIs new B-20 guideline is now making the banks to cut-down the limit of HELOC lending. The limit is now sits at a level that practically offers no cash incentive for a borrower to go through the process.
Lowering House Prices:
In its recent report CREA reported lower home sales and only 0.3% price appreciation compared to August 2011. An inflation rate that is number of times more than that mere 0.3% increase – clearly shows the downward trend in housing.
While the house prices fall the lenders will use extreme caution to grant loans backed by a home. We will see more cautious appraisals and detailed examinations of the applications. These all will act as deterrents against home equity lending.
Can’t Save Much by Re-financing:
Borrowers who took mortgages in between 2008 to 2009 got about 5% interest rate on their five years fixed rate mortgages. As we know – about more than half mortgagors break their mortgages before third anniversary – so that high yielding penalty tide (for a lender) have come and gone.
Most have refinanced already to save money using the low interest rates.
Rates Are Not Going Up Soon:
Canadian Government Five Years Bond Yield
- Probably you know already that US Federal Reserve recently announced that they will continue the low interest rate for a long time. Canada cannot escape the effects of US decisions.
- Canadian inflation rate is weak and expected to stay weak. If Canadian core inflation rate continues to stay under 1.5% then Bank-Of-Canada may think about reducing the overnight target rate.
- Government has so far – few times – tightened the mortgage regulations and probably will try to rein in the red hot housing market again in future. Canadian Government don’t exactly like a downturn but they would not want a housing crash at any cost. So, the tightening indicate that they want to keep the rates low without fuelling the housing fire.
- Bank of Canada quotes European financial situation in all of its news releases. Europe is still in trouble.
Rate Has No More Room to Slide:
Whatever the future outlook is – it is very unlikely that there is any more room left for the interest rate to head South. There may be some 10 to 15 BPS up and down but anything more is not exactly sustainable for the lenders.
If rates are not going down then refinancing will lose its charm as a money saver. No one in his right mind will break a mortgage to go for a higher rate – unless it is strategically meaningful.
Home renovations are Slowing:
With the big box building supply stores facing turbulent times – future of renovation is not so bright at this time.
A CMHC report pointed towards this downhill trend of Canadian Home Renovation.
Bottom Line:
Although most of the factors are not showing bright signs – for a lender – there are some niches which are next gold mines for the lenders. They are – Education and Debt Consolidation. Don’t be surprised if you soon see big names are competing with the small lenders. We have surely felt their increased on-line presence.
The bottom line is that equity lending and re-financing will soon be dead for big lenders if the rate outlook does not change towards positive fast enough.
