Why this alternative lender's CEO isn't afraid of the mortgage cliff

Canadian borrowers are sensible about their finances and ready for higher payments, says Equitable Bank’s Andrew Moor

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Can Canadians survive the mortgage-renewal cliff? It’s a question that gained urgency in 2023 as economists and policymakers contemplated the impact that the millions of mortgage renewals expected over the next two years at significantly higher interest rates will have on consumers and the economy. If you ask Andrew Moor, chief executive of Equitable Bank parent EQB Inc., one of the country’s top alternative lenders, Canadian borrowers understand what they’re about to face, with the vast majority positioned to handle higher payments comfortably. The Financial Post’s Denise Paglinawan spoke to Moor about the mortgage cliff, the resilience of borrowers and where the challenger bank sees opportunity in 2024. The following interview has been edited and condensed.

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Financial Post: Do you think Canadians can afford their mortgages right now?

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Andrew Moor: Definitely, most people can. The employment rate is staying strong so people have income and they’ll be able to pay their mortgages. It may require putting in a bit of an extra effort or an extra shift. It may require reducing spending elsewhere. But I think the vast majority of people can handle their mortgage payments, there’s no doubt. There are some who got caught out a little bit on variable-rate mortgages in the rising-rate environment — perhaps things were a bit tight in the first place and maybe the income isn’t coming in quite as strongly — so some people will have some challenges but the vast majority of Canadian mortgage holders will be able to handle it quite comfortably.

FP: So you don’t anticipate your bank and other lenders will have issues with delinquencies or loan losses in the next year?

AM: In our case, about 80 per cent of our mortgage holders have mortgages that either have already been renewed at these higher interest rates or were originated at higher rates. So again, I feel some customers are suddenly finding it a bit of a struggle, but the vast majority are able to produce the income required to service their mortgage debt.

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FP: Do you think the mortgage cliff will cause the economy to fall into recession?

AM: I think the mortgage cliff is a bit overstated, frankly, even as a concept. When I talk to our customers, they understand what they’re about to face. So even the people that haven’t renewed yet, they’re socking away a little bit more money to make up for the pending higher payment when they do renew. The mortgage market, the housing market, is a very complex market. Most Canadians are pretty sensible about their financial affairs and really understand what they’re about to face. The idea that all of a sudden, you wake up Monday at a much higher rate and will be surprised by this, for most people is not true. I find our customers are much more thoughtful about these things. People are thinking through their financial lives and how they’re going to deal with the ups and downs of interest rates, and so on.

FP: And what about the banks? How big a hit do you think they will take?

AM: I don’t think there’s much of a hit to take in the single-family mortgage market in Canada. House prices are up year over year. Typically, originating mortgages are around an average of 70 per cent loan-to-value. Most of our customers have up to 28 per cent equity on average. Home prices are holding steady and so I don’t see much of a hit to the banks at all. We’ll get through this. Of course, it does look as though the markets are anticipating that interest rates are going to drop through next year. The Federal Reserve has been very clear about signalling that and so there already is a little bit of relief around the corner.

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FP: Are you seeing the relative popularity of fixed versus variable mortgages reverse, heading into 2024?

AM: We are seeing a bit more interest in variable-rate mortgages. I think people are anticipating that rates are dropping, and don’t necessarily want to get themselves locked into fixed. In our book, people tend to go fixed anyway. Historically, we are seeing a bit of a trend of being slightly shorter in terms of people anticipating that they’d like their mortgage to mature and then reset to a lower rate in the future. (There’s also) a slight preference for variable rate on the basis that the Bank of Canada is going to be easing, so the payments will start to drop in those mortgages. And then perhaps somebody wants to turn that into a fixed-rate mortgage once they believe that rates have dropped. You’re starting to see consumers anticipate mortgage rates dropping.

FP: Why do you think a lot of your customers at Equitable are sticking to fixed-rate mortgages?

AM: They’re sticking to fixed but they’re sticking to shorter-term fixed so they get to renew earlier. I think it’s a similar stance. Maybe you want to make sure that your payments aren’t going to go up over the next year if you just bought a house, for example. So it’s fixed by the end of one or two years. But anticipating that one or two years from now the rates will drop and then you can renew at a lower rate. It’s a bit of a variant of the same theme of either borrow with a shorter fixed-rate term or borrow variable expecting the rates are going to be dropping. I think we’re certainly seeing a bit more of that view in the market.

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FP: What else should we look out for in the next year?

AM: I think there’s a couple of big things for us. We have this challenger bank ethos where we look and go after specific niches or specific needs. One of our general theories is that Canadian seniors could get better services from the banks and specialist providers. We call it the decumulation business, where we both provide reverse mortgages and lend against life insurance policies. It’s clearly something that we see as a good growth opportunity. Like Western societies around the world, Canada has an aging population. People have a lot of equity tied up in their homes or in other kinds of assets. So helping people navigate how they use the capital in those assets to fund their retirement lifestyle is really interesting.

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