Nowadays the mortgage market is very unpredictable. The information needed to take right decision is changing at very fast paced in terms of mortgage qualification, mortgage rates, lender guidelines, BoC decisions, appraisal guidelines and many more. Every homeowner with a variable-rate mortgages brace as a result of the 6th rate hike in this year (October 26) from the Bank of Canada and another hike is coming very soon on Dec 7th as per BoC Governor but we don’t know how big will be the hike. But the reality is that fixed rates have risen as well as most bank lenders respond to the rate increase and increasing bond yield. And while there may be fewer rate increases over the next 12 months, the Bank of Canada has made it clear that “the policy interest rate will need to rise further”.
Most of the prime lenders have already raised their five-year fixed-rate for both 25-year amortization and 30-year amortization with more rate increases likely to come. The reality is that Canadian homeowners haven’t seen this type of rate increase since the early 1980s – which means for a majority of those paying mortgages, they’ve never seen this type of rate increase – ever.
What does this mean for clients? 5 things for you to consider:
#1
Buyers and Sellers:
It’s easy to understand why virtually every client and potential client is now evaluating what they should do in light of current market conditions. As a result, more than 2/3 of those surveyed have indicated that they “just looking” while 1/3 are ready to buy.
But for those looking to buy a new home, they’ve seen any potential upside in reduced home prices obliterated by skyrocketing borrowing costs. And the reality is that the home prices have not dropped enough to be offset by those rate increases.
Add to this that the prices in many markets have not dropped over the past few months as those that don’t need to sell are just not putting inventory on the market while hope to ride out the rate increases before having to sell at a lower price.
Not that you need a reminder but the market for people needing a new mortgage has shrunk.
#2
Changing Mortgage Market:
Because of the rapidly increasing rate increases, for most Canadians looking for a mortgage, mortgages that they would have qualified for 10 months ago, they simply no longer qualify for.
For brokers working on behalf of their client, this has meant deals that would have been easy-peasey 10 months ago, have become challenging. Circumstances that would have made sense for an A lender 10 months ago might not make sense today because of the amount of capital that is now required to service the loan. Clients should consult their plans with experienced mortgage agents or broker due to complexity of the market and available solutions.
Many client who were A lender clients, now shifted to B lender space due to many factors.
What was a 25 year amortization period 10 months ago is, by necessity, a 30 or 35 year amortization period today. What was a deal for a B lender (Trust companies, tier B banks, monoline institutions & credit unions) 10 months ago has become a deal that requires funding from C (private lenders like MICs and MIEs) today.
And clients should also need to understand and adapt quickly to these changes as well. They should clearly understand where they are qualified and evaluate their situation and affordability accordingly.
Even the solution from private lenders are shrinking due to extra due diligence and cut back on LTV’s and location restrictions.
#3
How Much More Does a Mortgage Cost:
Generally speaking, for every 50-point hike in the bank’s rate, such as the one announced on October 26, that rate hike, and that rate hike alone, will increase the costs of a variable rate mortgage loan by approximately $28 per month for every $100,000 owed.
For example, for any of borrowing clients with variable rate mortgages looking to renew in November will have to pay an additional $224/month for every $100,000 of mortgage loan owed (after you factor in each of the 6 rate increases that we’ve seen in 2022).
So, for homeowners with a $1 million mortgage loan looking to renew their mortgage (or are purchasing a new home) in November, they be paying an extra $2,240 per month over and above what they would have paid in early 2022.
The increase in monthly mortgage payment costs is sure to shrink the market of buyers that will qualify for a mortgage or, at the very least, will change which lender that they may qualify for a mortgage from.
#4
Real Estate Prices and their effect on LTVs:
Every lender is trying to determine what is the appropriate real estate value for a property – and that value will play a more important role in whether a lender will provide a loan today than it did 10 months ago. And while real estate prices may have stabilized in many markets, there is a strong sense that this is the result of lack of inventory from potential sellers electing not to sell their homes.
That makes it even more challenging for all lenders, A, B, C and D (non-licensed private lenders), to try to balance appropriate real estate values and the effect of those real estate values on LTV%. And that makes risk forecasting for all lenders even more challenging.
For many borrowers, it becomes even more important to have an appraisal in hand when working with mortgage lenders and to including a financing condition in their purchase agreements. Thye appraisal should be order ASAP to lock the value as market condition can change and hence your appraised value as well to avoid any shortfall later.
In a real estate market that has not yet stabilized from a price perspective, it is harder for lenders to get comfortable with real estate values – and to potentially finding themselves with what was a loan with a 60% LTV on the day the mortgage was given but soon enough ends up as an 80% LTV.
Nowadays the mortgage is not based on rates anymore, its based on solutions available and clients need to be very much aware of short term and long term financing cost and exit strategy.
#5
Strategies on Mortgage Renewals:
Many of the A lenders have recognized that between 10-20% of their mortgages will be up for renewal in the next 12 months. For those looking to renew, they are likely looking at an increase of approximately 18%+ in monthly payments at renewal based on the type of lender with now.
If you have clients whose mortgage is up for renewal in the coming months, there’s likely a strong sense of panic at the ideal that they will have to pay more to finance their home. If you’ve been helping clients for 5 years or longer, then you will have clients that probably feeling that sense of panic. And certainly, for those clients, now is the time for them to get a handle on their financial situation.
Most of Canada’s major banks and other lenders have an early mortgage renewal option that allows your clients to renew before their term ends without any penalties. And while renewing their mortgage before their renewal date occurs may allow them to get a lower rate, there are risks.
But that doesn’t mean, necessarily, that they will get the best rate available. And client are going to be driven by interest rates for the foreseeable future.
Many experts say that borrowers should be afraid to shop around to ensure you get the lowest mortgage rate at renewal. That said, many will undoubtedly decide to just stay with their existing lender rather than avoid having to go through the mortgage stress test process again with a new lender.
If your renewal is coming soon or in 2023, always sit with licensed and experienced mortgage broker to review before you sign the renewal offer from your current lender. This is the opportunity to take the right decision and right mortgage product. This is the time when you can consolidate existing debts and also plan for the upcoming life events expenses without any penalty.
What’s best for clients will depend upon their financial circumstances and other factors such as what they believe the outlook is for the Canadian economy and interest rates generally as well whether they anticipate staying in their homes for the next 5 years, and how close they are to paying off their mortgage. But for many experts, they don’t believe that clients should be deterred from looking at alternatives to see if they can get a better rate – because for many clients, if they passed the stress test previously, there is some likelihood that they will pass today.
For some buyers (or even those looking to renew) it may mean finding a way to provide larger down payments and have their parents co-signing on mortgages. Still, it will become a question of whether clients will qualify.
But for many, the increase in capital required to service the mortgage will mean that they no longer pass the stress test, and they will need to shop around and look for better rates and alternative lenders who don’t use the stress test – the B, C and D lenders.
Always feel free to consult with me for unbiased mortgage strategy session. Also you can reach out to me for any questions or concerns. Your feedback is highly important to deliver right content for your knowledge as well.
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