By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
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A new report from Teranet reveals that over 25 percent of the people purchasing properties in 2021 already owned their principal residence.
The Bank of Canada recently explained that investors (who can quickly refinance or cash out money from their existing properties) drive up the cost of property in Canada’s largest cities.
As a result, BoC expects that property prices will remain elevated and may even rise for the next little while; however, it also warns that home prices that rise this fast can expose the market to an abrupt correction.
Market corrections are suitable for house hunters, but they are bad for people who need enough equity in their property to refinance or obtain a second mortgage. Refinancing is the gold standard for things like debt consolidation or, as mentioned, tapping into equity to purchase additional property. It has also been a mitigating factor for those who experience unemployment or require a high-interest debt solution.
One of Canada’s significant issues with real estate and inflation is that market corrections can increase the risk of insolvencies. So while increasing property value is excellent for existing homeowners, it also fuels considerably more household debt that creates financial difficulties when and if the market is corrected.
Teranet’s new report shows that recent real estate purchases were made by those who owned at least one other property, increasing from just 10 percent of total buyers in 2011 to 25 percent in 2021.
On the contrary, the number of first-time homebuyers getting into the market is declining, especially since 2016 when the Mortgage Stress Test was introduced.
Concern Over Rising Interest Rates
While property prices are continuing to increase, so is the size of mortgage debt. A fundamental concern is payment shock if interest rates spike higher, which would leave borrowers vulnerable to bankruptcy or, worst case, requiring a power of sale.
There are also issues like rising unemployment rates and what that could mean if there are future waves of the coronavirus, which would create considerable ongoing financial instability.
Since many Canadian mortgage borrowers have increased their mortgages and have taken on secured lines of credit with larger credit limits, sudden corrections in the market may have severe consequences for some.
Currently, fixed mortgage rates are rising, and markets predict that variable rates will also begin to increase early next year.
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Sarah A. Colucci, Mortgage Edge Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
Sarah Colucci is a senior mortgage professional with Mortgage Edge, Ontario's leading independent broker house.