A rapid rise in interest rates will cool down the housing market, as inflation is at a three-decade high and the Bank of Canada signals it will hike rates significantly in the year ahead. The Bank of Canada began normalizing its monetary policy in March, raising its policy rate 50 basis points to 1.0%. It plans to raise it another 100 basis points by year's end.
Fixed mortgage rates have gone up, but the Bank of Canada's hiking campaign will soon make variable rates more expensive. The rate increase is pushing up the qualifying rate for a mortgage, removing stretched-out buyers from the market, and reducing the size of the mortgage and the price buyers can pay.
Higher rates will pose huge challenges for buyers, and the housing affordability measure may reach its worst-ever level in the third quarter. We expect poor and worsening affordability to increasingly weigh on homebuyer demand across the country, even with new federal initiatives.
Royal Bank of Canada revised its housing forecasts lower due to expectations for a more aggressive rate path from the Bank of Canada. This will help the market stabilize in 2023.
RBC projects prices to soften as rising rates, deteriorating affordability and cooling activity dampen market sentiment. However, stronger-than-expected gains will result in a higher annual average price for 2022 than previously anticipated.
Rising rates will hurt buyers in the most expensive markets the most. RBC expects larger annual price declines in British Columbia and Ontario.
While a market crash isn't completely ruled out, solid demographic fundamentals will keep demand from falling into a deep freeze. The housing market is tight, with inventories at historically low levels. Strong construction and cooling demand will balance the market.
Rising interest rates will bring more sustainable activity, fewer price wars, and modest price relief for buyers.
Source: Rising interest rates a game-changer for Canada's housing market
Rising interest rates a game-changer for Canada's housing market (2022). Available at: https://thoughtleadership.rbc.com/rising-interest-rates-a-game-changer-for-canadas-housing-market/ (Accessed: 19 May 2022).
Refinancing your home depends on many factors, and in some cases it is a wise decision.
Because you already own the property, refinancing is easier than securing a loan as a first-time buyer, but the number of years you will owe on your mortgage may increase.
If your current interest rate is 1% or more higher than the rate you want, refinancing makes sense. Also, if your loan term is 15 years, refinancing can shorten the term.
For a falling-interest-rate environment, an adjustable-rate mortgage is a good choice. For a rising-interest-rate environment, converting to a fixed-rate mortgage makes more sense.
In order to reduce your monthly payments, you must cover all the closing costs involved in the refinancing, including lawyer fees, an appraisal, taxes and any mortgage penalties.
If interest rates fall, your monthly payments could drop from $1,257 to $1,130, saving you $127 per month or $1,524 annually.
A lender can calculate your total closing costs for a refinance. If you plan to stay in your home for one-and-a-half years or longer, refinancing makes sense.
Canadian housing prices rose by 33 percent from March 2020 to November 2021, according to CREA. Conservative finance critic Pierre Poilievre said that Canada's housing bubble is set to burst if the government does not make changes to its policy.
A report released by Generation Squeeze called on Statistics Canada to change the way it calculates inflation, by including housing prices.
Generation Squeeze said rising home prices create wealth windfalls for some, but create un-affordability for others. Change in how housing prices are calculated could help policymakers improve affordability.
According to a report from the Bank of Canada called Housing demand in Canada: A novel approach to classifying mortgaged homebuyers the share of mortgage-financed home purchases associated with first-time homebuyers, repeat homebuyers, and investors has risen rapidly in Canada, but little was previously known about their characteristics.
It turns out that investors residing in 11 major cities in Canada buy about 4% of all the investment properties in non-urban regions, and this share is increasing over time.
Since 2015, investors' share of home purchases has risen and even more so in 2021. Repeat homebuyers have also seen their share of activity increase slightly over time.
TransUnion found that since 2014, 14% of home purchases in Winnipeg were made by investors, whereas investors made approximately 21% of all home purchases in Toronto.
It also seems that first-time homebuyers tend to be younger than other types of homebuyers. First-time homebuyers tend to have the highest loan-to-income ratios, a crucial metric the Bank of Canada uses to monitor financial vulnerability.
When looking at debt associated with the latest issued mortgage, we can see that investors are much more highly indebted than other types of homebuyers. Investors have higher total debt service ratios than non-investors, a ratio that captures payments on all debt, including prior mortgages and non-mortgage debt.
The Bank of Canada is unsure what sources investors include in their documented income because regulatory returns and underwriting practices vary across lenders. Also, investors are underreporting income when applying for a new mortgage, so the housing market's vulnerability may be overstated. This may not be a good sign when it comes to the housing market in Canada because investors in the housing market have increased their demand, which means they likely believe prices will continue to rise in value. This may actually be a source of instability for the financial system and the economy more broadly.
TransUnion did not provide personal information to the Bank of Canada. A 44% cut-off for the total debt service ratio for insured mortgages was used, while the cut-off for uninsured mortgages was left to the discretion of individual lenders.
What does this mean?
Economists have argued that Canada's biggest cities and their surrounding areas are experiencing a real estate bubble mainly because the market is being driven by investment speculation. Currently, the main issue with Canada's real estate market is limited inventory and rapidly rising property prices.
Time will soon tell whether increasing interest rates and new Government policy will flatten the housing curve.
As always, if you'd like to discuss mortgage financing options, please call or write.
Sarah A. Colucci
Senior Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
Federal mortgage policies help investors but are driving first-time buyers out of the opportunity to own a home: Here are two ways to get in to the market as a new buyer.
The federal government introduced the mortgage stress to make it harder to qualify for mortgage financing and ultimately reduce maximum mortgage limit by approximately 30 percent. The stress test also protects federally regulated financial institutions from "payment shock," a situation wherein borrowers are at an increased risk of default due to rising interest rates.
Besides making it harder to qualify, the stress test also gives investors or those with a larger downpayment an unfair advantage in the market. For example, a borrower with a down payment of 20 percent or more will find it easier to qualify for mortgage financing than someone with a smaller down payment since they can extend their amortization period to 30 years and lower their monthly payment. Furthermore, they can also qualify with credit unions that use the "contract rate" or apply with alternative lenders, also called "B" lenders.
Thus, conventional borrowers have more financing options and, as a result, they continue to dominate the market, as is evidenced by the fact that purchases made by first-time buyers are decreasing while those made by investors (those who already own their principal residence) are exploding year after year.
Regrettably, government policies meant to help the overall market by "cooling" it are driving more inflation and pushing a smaller segment of buyers out of the market altogether. Add to this: because having a smaller down payment makes mortgage lending riskier for banks, rules like the "stress test" will remain in place for the foreseeable future, likely continuing a cycle of unfairness between investors who get to own more property and first-time home buyers, who find it challenging or impossible.
If you're a first-time homebuyer with a down payment that is less than 20 percent of the purchase price, you may wonder what you can do to "get in" to the market. Here are two suggestions:
Do you have a mortgage question? I would be more than happy to assist you with your questions or concerns. Please call or write today.
There are many reasons people pay off their entire mortgage or a portion of their mortgage balance earlier than expected.
Most mortgage contracts allow a prepayment privilege up to a certain percentage annually, usually not exceeding 25 percent of the original principal balance. Therefore, even if you don't have enough funds to pay off your mortgage in full, you may come into a windfall of cash, have some money saved or even receive a tax refund that you feel can lower your mortgage balance. Lowering your mortgage will also reduce your monthly payment and decrease interest during the term.
Still, you may wonder whether it's best to pay down your mortgage or reinvest the funds elsewhere, possibly generating a higher return that you could use to pay down your mortgage in the future. Like any other financial decision, it all comes down to your financial situation, risk tolerance and overall strategy.
In the 80s, 90s and 2000s, paying down one's mortgage remained a top priority because interest rates were much higher (try 12 to 19%). Additionally, most property owners weren't diversifying their investment portfolios like today in the wake of lucrative investments like cryptocurrency.
It's critical to learn how mortgage financing works so you can make a better decision about your extra money.
Mortgages in Canada are amortized up to thirty years, but the terms are shorter, usually between one and ten years. Your payments will get based on your mortgage amount, interest rate and will be stretched out over the maximum amortization period during the term limit of your mortgage (i.e. five years).
The idea is after each term; you renegotiate your mortgage rate. At the same time, the amortization period gets smaller, meaning you stay on track to pay off your mortgage within twenty-five years, for example, from when you initially took on the mortgage loan (if that's the amortization period you chose).
Your mortgage payments are comprised of both principal and interest. As you pay down your mortgage, the interest you pay will become less and less, while more will go to the principal.
Most mortgage contracts have a clause that allows prepayments of up to twenty-five percent of the original principal balance annually. So, for example, if your mortgage is $300,000, you could pay up to $75,000 each year without a penalty. Whenever you make more than the prescribed principal and interest payment, the funds get allocated to strictly principal, reducing your amortization period, meaning you're on your way to being mortgage-free sooner.
Of course, making any amount of allowable prepayment is beneficial. Still, when interest rates are low, like today, for example, it may make sense to invest the funds into an asset that's earning more. If you're earning 4 percent, isn't that better than saving 1.45 percent on your mortgage?
On the other hand, when you pay down your mortgage with larger chunks of money, like the total allowable prepayment limit, you get to renegotiate your monthly mortgage payment, which could drastically help with cash flow.
Reducing monthly obligations may mean more to you than earning money in investment portfolios, and that's why it's essential to speak to a mortgage professional and financial advisor about sorting through which is the better option.
Investing in other properties.
If you have an increased appetite for risk, you may also consider using your additional funds to expand your real estate portfolio. You can use the money as a down payment on another purchase, financing the rest. Factoring in market appreciation and the rental income that will reduce the mortgage balance, you may find this is more lucrative than simply reducing your amortization period of the mortgage registered against your principal residence.
Investing in other Markets.
Again, depending on your appetite for risk, you may find investing in financial markets of sorts more advantageous. The rate of your return might exceed the amount of interest you saved by prepaying your mortgage.
For example, $100,000 invested that garners a return of 10% may earn you an additional $159,374 compounded over ten years.
It is best to speak to your financial advisor to determine your level of risk tolerance, based on your age, amount of time the money will get invested before you'll require it again, and your overall financial goals.
It's important to note that the market can be a blessing and a curse. You may lose on stocks, and therefore, in the end, not acquire as much profit as you thought. A 10 percent return can quickly plummet to a 1 percent return depending on what is happening in the economy.
On the flip side, paying down your mortgage is permanent and will always reduce your amortization provided you don't refinance or increase it through other means. Still, even if you did, you can structure payments to tailor the amortization period to what you need or want.
Do you have specific mortgage questions? I would be more than happy to help you sort through your options for free, without any obligations to apply for mortgage financing.
Get in touch today. Call or write.
In a surprising yet not wholly unexpected turn of events, the Omicron Covid-19 variant has negatively impacted the economy.
Given the expectations that the Central Bank would begin to raise interest rates now that the economy was recovering from the pandemic, it may be somewhat of a shock (or not) that the Bank of Canada is doubtful about raising interest rates in the face of Omicron.
Economists and mortgage experts from across the country admit that the overnight lending rate must increase to stop inflation from soaring to unprecedented levels. But if the economy is tottering on volatility like another wave of lockdowns and further disruptions both internationally and here at home, the BoC may have no choice but to leave rates low for some time. Of course, this will only add more speed to the increase in real estate value, currently plaguing cities like Vancouver, Toronto & Calgary.
On December 8, at the last meeting, the Bank of Canada decided to leave its overnight rate at .25% even though it had signalled this rate would increase because of mass vaccinations and job recovery.
Although the global economy is showing signs of positive growth like in the United States, where there has been much economic expansion, other countries still face shortages and disruptions to various supply chains.
Omicron has also raised concerns, and, as a result, has initiated various travel bans by countries around the world. Oil prices have also declined, which has regenerated insecurity about how the global economy is recovering.
The Bank of Canada states it remains "committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved."
You may wonder if obtaining a mortgage in Canada without income is possible. Perhaps you are self-employed or unemployed or receiving pension income like Canada Pension Plan (CPP) or Old Age Security (OAS).
Many different mortgage programs can help you purchase property, but qualifying will depend on a few factors.
Let's look at the different employment types, including unemployment and other factors like credit scoring and available down payment or equity in an existing property (if you're already a homeowner).
SELF-EMPLOYED AND GETTING A MORTGAGE
If you're self-employed, it's possible to get mortgage financing. To get a mortgage with a major bank, credit union or "mono-line" lender (a prime lender without a storefront), you must have been in business for at least two years, and you must have claimed enough income on your last two years of taxes to qualify. Prime lenders usually do not have "stated income" programs that solely rely on the "reasonability" of income or bank statements. Therefore, you will have to claim enough income to qualify.
If this doesn't apply to you, you can still try other options. It's not unusual for self-employed borrowers to claim very little on their income taxes, rendering them ineligible for a standard mortgage loan. In this case, depending on your downpayment, credit score and gross business income, we can try the "stated income" program offered through either of the two high-risk mortgage insurers CMHC (Canada Mortgage and Housing Corporation) or Sagen (formerly Genworth). To qualify under the stated income program, the lender, along with the insurance company, will review the following:
If you qualify, the bank will offer you the best mortgage rate, which is an insured rate. However, you will have to pay an insurance premium, added to your basic loan amount and amortized out to a maximum of twenty-five years.
Suppose you don't qualify under the stated income program or conventional criteria. In that case, depending on the size of your downpayment, we could apply with an alternative lender, also known as an "Alt" lender. Alt lenders don't necessarily rely upon conventional income but can consider bank statements or even invoices and contracts to verify revenue. Alt lenders usually charge .50% to 2% more than traditional loans and a commitment/lender fee of approximately one percent of the loan amount.
PENSION INCOME AND GETTING A MORTGAGE
Many potential borrowers are surprised to learn that pension income is a qualifiable source of income for Canadian mortgage loans. Banks can either use pension income from Canada Pension Plan, Old Age Security, Retirement Income Fund, or more to qualify you. With prime lenders, your pension income will have to service the loan using standard qualifying criteria, and if it can't, you will likely have better luck with an "Alt" lender since these types of lenders can lend more based on income to mortgage amount ratios.
What if you have zero income?
It's still possible to obtain mortgage financing even if you don't have income. You may need to apply with a private lender that can consider the amount of your down payment or available equity along with your credit score. Depending on your age, you may also qualify for the CHIP Reverse Mortgage that pays you each month using the available equity in your home. The CHIP mortgage may be the best option if you have a lot of equity but don't have income.
You may also be able to qualify without income if you have a co-signer who can apply with you. A co-signer may be able to go on title with you or remain off-title as solely a guarantor.
If you have any specific questions, get in touch with us by phone or email.
According to TransUnion, one of Canada's central credit reporting agencies, Canadian mortgages grew by 49 percent and $145 billion during the second quarter of 2021.
When looking at the size of mortgage debt, the report detailed the average amount grew approximately 22 percent to $379,567. This year, mortgage originations grew a little over $200 billion.
It is clear that pent-up demand, which happened during the pandemic, fuelled higher than average market growth and further prompted the relaxation of mortgage rules allowing an additional supply of credit to stream into the real estate market and accommodate the demand for more credit.
One worry many economists have is the rate of delinquencies since consumers are taking on larger mortgages faster than ever before. Statistics offered by TransUnion show a decline in mortgage delinquency in the country, falling by approximately 5 percent to .13 percent.
According to TransUnion, a large segment of the already minor delinquencies reported were due to mortgage and credit deferrals offered because of the pandemic.
Survey Finds That More Than Half Of Young Potential Buyers In Toronto Have Given Up On Ever Owning A Home.
A new survey has found that more than half of young people in Toronto who want to buy a home have already given up on the idea due to soaring real estate prices and the cost of living.
The Sotheby’s International Realty survey looked at 1,502 Canadians aged 18-28 across the country and focused on downtown neighbourhoods in Vancouver, Calgary, Toronto and Montreal. It found that more than half of young people in the GTA who wanted to purchase a home had given up due to high housing prices.
Sixty percent said they were “seriously considering” moving out of Toronto in order to own a home. A third said they planned on leaving within two years, and another 17 percent said they would be gone within four years.
The trend was consistent in other cities. In Calgary, 49 percent of respondents said they had given up on homeownership, as did 47 per cent in Montreal and 43 per cent in Vancouver.
“There’s been a seismic shift over the past decade when it comes to how young people view real estate and homeownership,” said Ross McCredie, president of Sotheby’s Canada.
“It’s not that they don’t want to own a home; it’s that they can no longer afford to do so in the neighbourhoods they grew up in. They are now being forced to look further and further afield for a property they can afford.”
The report comes as Canada faces a growing affordability crisis, particularly in its largest cities. Last month, the Bank of Canada warned that Toronto and Vancouver were at risk of a housing market crash due to high levels of household debt and soaring prices.
Home prices have more than doubled in Toronto since 2009 and are up more than 60 percent in Vancouver.
The Sotheby’s survey also found that most young people no longer view real estate as a reliable investment. Just over half of respondents said they believe home prices will decrease in the next five years, while only 15 percent said they think they will go up.
Sarah is a senior mortgage consultant, working with Mortgage Edge, Canada's largest independent brokerage house. Get in touch at email@example.com.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
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Sarah A. Colucci, Mortgage Agent Lic. M14000929
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