NBF: Mortgage Originations Hit Near-Record Highs, Driven by Refinancing Not Sales

Refinancing activity is fueling the spike in new loan issuance, creating echoes of the pandemic-era trends.

The Canadian housing market remains subdued, yet new mortgage originations are experiencing a significant surge. This counter-intuitive trend is being driven by a wave of refinancing activity, according to a recent report from National Bank Financial Inc. (NBF).

The Data Disconnect: Sales Volume vs. New Loans

The latest figures from the Bank of Canada reveal a striking pattern:

• Total Originations: New mortgages worth $300 billion were written across the second and third quarters of this year.

• Historical Peak: This is the highest total recorded since 2021, when interest rates were at rock-bottom levels during the height of the pandemic.

NBF highlighted the disconnect in its research note: “Over the last six months, mortgage origination has surged to near-record levels but that’s not being driven by a rejuvenated housing market. In fact, the volume of home sales is still only two-thirds of what it was in 2021, when mortgage origination peaked.”

The Pandemic Echo: Five-Year Loans Coming Due

The current spike in mortgage activity is essentially a delayed reaction to the pandemic era. NBF noted that a record volume of five-year, fixed-rate mortgages were issued in September and October 2020.

“Those are coming due and as this reverberation continues, origination will remain high in coming months,” the firm stated.

A Shift in Borrower Preference: Shorter Terms and Variable Rates

Unlike the 2020 boom, current homeowners are not overwhelmingly opting to lock into new five-year, fixed-rate products.

Instead, NBF observes two distinct borrower trends:

1. Variable Rates Dominate: More borrowers are electing for variable rates. NBF reported that the number of variable-rate mortgages issued this year exceeds the total volume issued in the previous two years combined.

2. Shorter Fixed Terms: Those choosing fixed-rate loans are increasingly selecting shorter terms. This likely reflects that short-term rates are currently more favorable, and some borrowers are banking on future rate cuts, hoping to refinance again later at even lower rates.

The Outlook: Rate Cuts Look Unlikely

Despite borrowers’ hopes for further rate decreases, NBF suggests this scenario is currently improbable.

“We don’t see much downside for mortgage rates,” the firm commented. This perspective is based on the Bank of Canada having “indicated its easing cycle is over, implying the next rate change could be a hike.”

NBF concluded that while it will probably “take time for these hopes [for lower rates] to break,” shorter-term fixed-rate mortgages will likely continue to be popular. Furthermore, if the market begins to anticipate monetary tightening, “fixed mortgage rates will rise making variable even more attractive.”