The Market, What’s to Come, Mortgage Options and Opportunities
With this year’s steep increases in interest rates, and as the real estate market has slowed, most are wondering when things will begin to normalize. What caused these conditions? What’s to come as we move ahead? And what choices and opportunities might we have today as they relate to our mortgages and properties?
Looking Back at The Market
Inflation and rising rates are at the forefront of market conditions impacting borrowers today.
Inflation – Since COVID, supply chain disruptions have caused higher costs, which were heightened with the conflict in the Ukraine affecting its iron, steel and food exports, and Russia’s supply of oil and gas to Europe.
Rising Rates – Governments around the world are raising interest rates in response to inflation. The Bank of Canada has increased the overnight rate by .5%, .75% and 1% increments, very unlike its typical .25% moves. The Prime Rate sits at 2.2% above the overnight rate with most banks so has increased in turn affecting variable rate mortgages and lines of credit. Fixed mortgage rates and the rate at which borrowers qualify for mortgages, have increased too.
Looking Ahead
Though the market had inaccurately forecasted where things are today, we nonetheless only have forecasts to work with when planning next steps.
Fixed Rates – Today’s outlook, according to most Canadian bank economists, is for fixed rates to stabilize in the coming year.
Variable Rates – The Prime Rate is forecasted to increase by another .25% to .5% at its peak before leveling according to some, while others predict the Prime Rate will drop again by .5 or 1% by the end of 2023.
Economy and Lowering Rates – The more rapidly rates increase, the more likely a recession occurs, which is when governments typically lower rates again. Lower rates would allow borrowers to qualify for more once again as well.
Property Values – With immigration increasing and development slowing due to higher labour and material costs, real estate values may begin to increase again as supply of new homes begins to be felt in the market in the coming years.
Borrowers Today
Variable Mortgages – For variable rate mortgages with payments that change with the Prime Rate, payments have increased this year by approximately $170 per month for every $100,000 of a borrower’s mortgage balance.
Static Payment Variable Rate Mortgages – For variable rate mortgages with payments that don’t change with the change in the Prime rate, some borrowers are approaching a trigger rate at which their payment no longer covers the interest nor any of the principal owing within a given payment period.
Fixed Mortgages – Borrowers with fixed rate mortgages coming up for renewal may have higher rates than in their previous term. However, the renewals section below should ease some of the concern with rising mortgage payments.
Renewals – When entering a new mortgage term, at the end of 5 years for example, the rate is reset. If the new mortgage rate is double the rate of the initial term, the payment does not automatically double. The payment calculation and rate do not relate on a 1 to 1 ratio, which should bring some relief to borrowers contemplating what their payment might be for their upcoming term.
Borrowers should check into renewal options across lenders well with me in advance of their renewal date. We can plan to ensure they are well positioned for cost savings, taking current opportunities and their future plans into account.
Pre–Qualifying – Some borrowers are preparing for opportunities as the market opens back up or as sudden opportunities present themselves. Doing so in advance gives them the advantage of being able to act quickly working with me should speed be a factor in a negotiation with a seller with tight timeframes.
Choices Today
In response to higher interest rates and less certainty in the market, borrowers are reviewing their options. If you have a concern about qualifying, check with me on the many ways I might assist you in securing a new mortgage or making a change to your current one. Qualifying across lenders is not one-size fits all, and not all lenders have the same criteria for mortgage approvals.
Lowering Minimum Payments – Some borrowers are lengthening their mortgage amortization (length of time it takes to repay the loan) to lower their minimum payment due.
Eliminating Monthly Payments – Some are refinancing to consolidate debts, such as car payments, to stretch the payment over a longer time by incorporating the payment into their mortgage.
Keeping Mortgage Paydown on Track – If their payments don’t increase with the prime rate, some variable rate borrowers are increasing their payments or making lump sum payments to keep up with paying off their mortgage in the time they had planned.
From Variable To Fixed – Some variable rate borrowers are contemplating locking into a fixed rate mortgage for a shorter term to ride out this next period until rates stabilize. Others have locked into a longer term depending on what’s available to them. In each case, the higher penalty that can come with a fixed rate mortgage is important consideration before making the decision to lock in.
Line of Credit Cushion – Some are adding a line of credit to add a cushion by accessing the equity in their home, which can help once they move to have access to deposit funds without having to liquidate investments. Others are using the line of credit as a mortgage to enable them to make interest only payments. This is not a recommended long-term solution however, and the maximum loan amount is limited to 65% of the value of the property.
Second Mortgages – A second mortgage gives borrowers access to their equity, which is also not a long term solution, but can assist with cash flow in the short term, as payments are often interest only.
Age Restricted and Non-Age Restricted Reverse Mortgages – Reverse mortgages are typically taken by borrowers over the age of 55 on their principal residence. Rates are usually higher than regular home loans. However, never having to make any payments can lift a burden for those with cash flow issues in retirement, and allow them to stay in their homes. Other lenders offer non-age restricted reverse mortgages on principal residences, rentals and second homes in some markets. In both cases, borrowers retain the title to their home, and the mortgage is registered just like any other mortgage, but the balance grows over time as no payments are made. Reverse mortgage loans are not granted for more than half the value of the property to allow room for the balance of the mortgage to increase over time.
As every case is unique, to evaluate your options and opportunities, please don’t hesitate to be in touch to discuss your situation with me and to make a plan.