Over the last few years, you’d expect that first-time homebuyers were doing the same type of due diligence when it comes to weighing making an offer on a home – and negotiating a mortgage around that offering price – in the same way as first-time homebuyers have been doing for generations. But previous generations weren’t going to learn what it means to be ‘underwater’ with a mortgage, while anyone who was doing their homework over the last 5 years almost certainly will know what it means.
Some people evaluated the risk they might be at if interest rates rose, and moved ahead with their decision to buy the home and assume the mortgage they have today. Others will have reconsidered and decided they didn’t want to take on that type of risk. There may well be 20-20 hindsight types in either group who’d wish they had acted differently, but these days it is probably those who overextended themselves with a mortgage that is going to become more expensive to service who have more regrets.
This is something that any informed and conscientious realtor will want to be proactive in talking about with clients who are hesitant to buy a home. Working with clients who are selling a home doesn’t create the same type of need for a conversation around this, but interest rates and other factors are keeping sellers on the sidelines more now as they wait for home prices to rise again before listing. This in turn affects homebuyers with fewer homes on the market pushing up prices on the ones that are. Here at Real Estate Leads our online real estate lead generation system is an excellent way for realtors to give themselves a real advantage with new client generation.
Getting back on track with our topic here for this week, there are estimates that it is near ¾ of a million purchased homes in Canada that may be at risk because of changes to rates, and so let’s get into the details of all that.
Variable Rate? Brace Yourself
Many borrowers who took out variable-rate mortgages at the peak of the housing market frenzy in 2021 and early 2022 may need to resign themselves to higher payments next month or even have to make a lump-sum payment for their mortgages. This is because the fixed monthly payments that buyers would make with a variable mortgage will have them facing ‘trigger’ rates this fall, where an increase in payments becomes unavoidable.
Industry estimates are that this may apply to approximately 15% of variable-rate mortgages in Canada, and that works out to something in the vicinity of 750 thousand homes. So here you may be asking what a trigger rate is exactly; it is the point at which interest payments constitute the entirety of a monthly mortgage payment, and now the borrower is not paying down even the smallest part of the principal they borrowed. This will be its own cause for concern, but it’s important to know that the bigger issue is that Canadian lending regulations don’t allow for this.
So what will happen is these individuals will receive a communication from their lender giving them one of 2 options; either increase their monthly payment or make a lump sum payment against their mortgage to lower the amount owing. Both are going to be tough options for a lot of home buyers who have overextended themselves. Some may also have the option to switch to a fixed-rate mortgage but the risk there is they end up locking themselves in at unnecessarily high rates.
This is also something that realtors can be assertive in informing clients about, even if they’re not working with them on the purchase of a home at this time.
Rock-Bottom Rates Gone
$260 billion dollars is the estimated value put into variable-rate mortgages between March 2021 and February 2022, and with an average interest rate of 1.58% during that time it is not surprising at all that is the case. But if the BoC raises its key lending rate by anything more than just ONE more percentage points (100 basis points) then the average of these mortgage is set to hit its trigger rate immediately thereafter.
Guaranteed? No, but very likely if you read into what economists are saying. The Banks has bumped up the rate 4x this year already and we still have a third of it to go as we move towards entering Fall 2022 in less than a month’s time. So from there let’s consider that the bond markets are pricing in a 75-basis-point rate hike, and look for this on Sept. 7 when the BoC makes its announcement. Some believe it may end up being a full 100 basis points.
RBC is also saying it has in the vicinity of 80,000 mortgages that will hit their trigger rate with the next few rate hikes, coming with an average payment increase of $200 per month or so. Borrowers may have passed their mortgage stress test, but this still has the potential to be very problematic for many owners and especially those struggling with inflation in Canada as it is.
The overhead reality in all of this is that we’re going to see a share of mortgage borrowers that are exposed to fluctuating interest payments from month to month, and we’re going to see that share be at alarmingly high level at a time when rates are rising quickly.
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