Expect a wave of Canadians to make the move
It’s no secret that a big wave of mortgage renewals is beginning in 2024 – and higher interest rates could spur a major trend of Canadians shopping around rather than simply renewing with their existing lender, according to a prominent mortgage industry CEO.
Jesse Abrams (pictured), co-founder of the Homewise digital brokerage, told Canadian Mortgage Professional that borrowers were likely to spend more time searching for the best renewal deal than they might if rates were still at or near the level they originally signed at.
“In this coming year, there are a few main factors that are going to come into play. One is that there’s a lot of mortgages up for renewal that are going to be renewing at a rate that’s 1% to 2.5% higher, maybe even 3% higher, than the rate they originally had,” he said.
“So it’s going to create a market where people should be a shopping around a lot more for their mortgage, and I think that’s going to be the name of the game this year for a lot of people renewing, refinancing their mortgages: people shopping around a lot more than ever before, maybe not signing that letter that they get from their bank three, four months before renewal.”
Lower rates could help boost consumer confidence
With fixed rates sliding in recent weeks – and the expectation that the Bank of Canada will begin to slash its own benchmark rate, which leads variable rates in Canada – there’s also the prospect of a revival of sorts for the housing and mortgage markets, Abrams said, as consumer confidence begins to grow.
That would be a welcome departure for Canadian borrowers from the headlines of the past year, with rising rates leading to tighter budgets and steeper qualifying criteria in the mortgage space.
“Once the Bank of Canada does potentially drop its rate again this year, it’s going to create more positive commentary around the market,” Abrams said. “As more positivity comes into the media around rates dropping and what that means for housing and what that means for affordability – mixed with the fact that home prices have actually started dropping – it could lead people to jump into the market.”
Such an uptick would hardly rival the “craziness” of Canada’s pandemic-era housing boom, Abrams said, but could still contribute to more normal spring conditions and the prospect of a more conventional market than that seen in recent years.
Royal LePage is expecting potential reductions in the Bank of Canada’s interest rate to propel a 5.5% annual increase in the national aggregate home price during the final quarter of 2024.https://t.co/aryVtVk1KQ#mortgagenews #interestrates #housingmarket #houseprices
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 4, 2024
Still, despite the prospect of rates coming down later in the year, Abrams said he would be surprised to see a big upsurge in Canadians choosing to refinance, except in specific circumstances.
“Where there could be a reason for refinancing is a lot of people made bad financial decisions in 2021 and 2022, and they took out a car lease that they can’t afford now. They took out loans that they can’t afford now. And they were floating rates,” he said. “They started to go up and those are folks that will [finance] at even 4.5% or 5% because it could help them pay off their other debts.
“But unlike in 2020, 2021, or early 2022, when rates were low and people were financing to upgrade their home, change their kitchen, or do whatever they wanted to do from a life perspective, I think with the rates where they are right now and people not yet feeling the full pain from the rate increases yet, I’m pretty bearish on the refinance market.”
Could some Canadians choose to sell second properties at renewal time?
On the renewal front, another trend to watch is Canadians who own investment properties and second homes who may prefer to sell their property rather than stomach the cost of a higher rate, according to Abrams.
“While they might qualify for the updated rate, they might look at it and say, ‘It might not make sense to carry this property anymore. Maybe it makes sense to sell it,’” he said.
Others still might reason that while their home’s value has depreciated, so too has that of the property they have their eye on, meaning they’ll still be compelled to keep their homebuying plans on track.
“People might say, ‘Hey, I bought this home for $700,000. It might have dropped in value by 10%, but the home I want to buy for $1.2 million now also dropped by 10%,’” Abrams said. “And that’s the difference between $70,000 and $120,000 that they might be saving money on.”
Such an approach could well suit buyers who have a long-term view of homeownership in mind, he added. “If you’re just looking at short-term rates, rather than then long term of homeownership and not thinking about the whole financial picture, you might be leaving some money on the side that could be lost if home prices do go up, as they’ve been going up quite steadily over the last 30 years, fairly soon.”
