The mortgage industry could be facing a much different environment if the central bank hadn’t decided to slash rates to record lows in 2020, says MIC executive
The Bank of Canada is gearing up for what many pundits say could be the start of a new rate-hiking cycle – but the housing and mortgage markets are still dealing with the impact of its COVID-era rate policy even years later, according to the president of a prominent mortgage lender.
The central bank slashed its benchmark rate to a rock-bottom 0.25% at the onset of the pandemic, helping cause a homebuying frenzy as mortgage rates plunged and borrowers jumped into the market.
A series of rapid rate hikes in 2022 and 2023 put a halt to that housing boom, but Westboro Mortgage Investment Corporation president Derek Serra (pictured top) told Canadian Mortgage Professional he still sees the negative effects of the low-rate era seeping through.
“I think that we’re still kind of recovering from the decision to have lowered interest rates during COVID. And the outcome of that decision sparked such an incredible inflationary time for Canadians,” he said. “I’ve been in banking for 30 years, and I’ve always seen Canadians using the equity in their home as an opportunity for them to pay for their kids’ education.
“There was almost a kind of a familiarity or a consistency with expecting a little bit of growth in the value of your home. And so when these inflationary times came through COVID, which was triggered by the very low interest rates, the average Canadian saw rapid increases in their property values – which at the time sparked them to do more than what they usually do without, necessarily, the kind of long-term perspective.”
‘There was the opinion that rates… would stay low for a long time’
In 2025 and 2026, scores of mortgages originated during the pandemic have come up for renewal, almost always at much higher rates compared with five years prior.
That trend is part of the reason mortgage delinquencies are climbing, with Canada Mortgage and Housing Corporation (CMHC) indicating on Tuesday it doesn’t expect the rise of mortgage arrears in Ontario to end until the middle of next year.
Serra suggested the Bank of Canada’s decision to dramatically cut rates in 2020 might have been the wrong one looking back.
“There was also kind of the opinion that rates would be low and stay low for a long time, and obviously that shifted for a variety of reasons,” he said. “And now we’re seeing the outcome of that decision.
“In hindsight, it’s always easy to look back and question, but you wonder if maybe we hadn’t dropped rates at the time, we would have felt more pain then – but it would have been a different kind of 2026 now.”
As the central bank embarked on a rate-hiking spree in 2022 and 2023, industry and expert opinion was divided on whether governor Tiff Macklem had misled Canadians by suggesting that interest rates wouldn’t be rising anytime soon.
Macklem told the House of Commons standing committee on finance in November 2020 that Canadians “can be confident that borrowing costs are going to remain very low for a very long time” – but within less than three years, the BoC’s benchmark rate had shot up by 475 basis points.
Critics said that reassurance may have convinced Canadians the time was right to purchase a home without factoring in higher costs down the line. Macklem’s defenders, on the other hand, pointed to unexpected developments including Russia’s invasion of Ukraine and the further supply chain snarls caused by the emergence of the Omicron COVID variant.
Appraisal challenges continue in higher-rate environment
As well as causing challenges for borrowers at renewal time, the post-pandemic march toward higher rates poured cold water on a red-hot housing market. In that environment, appraisal challenges have arisen because there are so few transactions in many cities to judge whether or how far a property’s value may have fallen.
Serra, though, pointed to some recent cause for optimism on that front. “The good news is we’ve seen a little bit of increase in the past four weeks in purchase transactions, and that is a really good sign,” he said.
“It’s an early indicator… but as we see purchase transactions, even if they’re at lower values, we’re able to now properly assess where the market’s at. If you’re living in a community where there haven’t been any sales, it’s very difficult to substantiate the value of these properties, especially for clients who are looking for higher loan-to-values.”
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