New buyers and homeowners alike are facing a rapidly changing borrowing landscape
Canada’s housing and mortgage landscape has changed dramatically in recent weeks as both the Bank of Canada and the country’s major financial institutions hiked lending rates and indicated that further increases are on the horizon.
After availing of record-low rates for nearly two years, Canadian homeowners and would-be buyers are suddenly faced with a rapidly shifting rate environment that could have a significant impact both on market intensity and the personal finances of mortgage holders and shoppers alike.
With that in mind, it’s essential that mortgage customers ask themselves some wide-ranging questions ahead of likely further rate hikes, according to a financial advisor with a leading credit union and lender in Canada.
Matt Morrish (pictured top), of BlueShore Financial, told Canadian Mortgage Professional that current homeowners who may be looking to sell in the near term should seek a full understanding of how the rising rate environment will impact their property value, with higher rates likely to put “downward pressure” on real estate prices in the long term.
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For buyers, meanwhile, he emphasized the value of having a preapproval in place, allowing them to lock in rates and insure themselves to some degree against higher borrowing costs down the line.
The evolving housing and mortgage landscape could also have the effect of removing buyers from the marketplace, something that Morrish said could cool the market’s intensity and remove some of its more problematic features of recent years, including frenzied bidding wars and subject-free offers.
“I expect to see more negotiation on prices moving forward. If you’re a buyer, this is probably a time where you just don’t want to rush,” he said.
“[Many] people, if they want to enter the market, are almost forced to write these subject-free offers. You should have the ability now to avoid that and if you’re buying a house, include an inspection. If you need to line up financing, you can probably have your subject to financing in there.”
It’s very unlikely to happen straight away, Morrish said – but a less intense market could also result in prospective buyers being able to negotiate on price and avoid paying many times over a property’s original listed figure.
For both existing homeowners and would-be buyers, stringently stress testing their budgets with rate increases is also an indispensable practice with future rate hikes down the line.
“Rates could be higher on your next mortgage term,” Morrish said of current mortgage holders. “What will that do to your payments? Can you reasonably expect to manage an increase within your own cash flow if your mortgage payment goes up?”
In terms of renewals or refinancing, a five-year mortgage term is a great choice for those who aren’t planning to leave their current home in the long run – but those who may be embarking on a big change in the near future should factor that into the length of term they choose, according to Morrish.
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“If you think [you’re] going to be looking at transitioning your property – whether it’s downsizing, upsizing, selling a rental property, whatever it might be – you ideally will want to try and match your term to that length of ownership,” he said.
“That way you can limit your prepayment charges, but you also want to be aware of your interest rate options. If you’re renewing, do you have an option to adjust your payments; are you looking to accelerate your repayment? There are other options that maybe aren’t front and centre.”
Ultimately, one of the key takeaways for mortgage clients in the current environment is that they should be acutely aware of what they’re purchasing – and how conditions in the market have changed over the past several weeks.
Borrowers who are planning on buying a strata property, for instance, should take as much time as they can to review the strata documents, Morrish said – reviewing for potential special levies and clarifying whether the strata has a sufficient contingency reserve fund.
“If you are buying a house or a townhouse, perhaps you know that inspection is something you don’t have to take off your offer,” he added. “Make sure you have that cashflow and that you stress test your own budget. That’s really key in this rising rate environment, and I think [it] will help people avoid potential financial hardship in the future.
And then just getting that preapproval. Don’t rush. It’s a rapidly changing environment. So take your time as a buyer.”
