The space has not been immune from rate hikes – but the value of brokers remains clear, says mortgage veteran
The story of the year in Canada’s housing and mortgage markets to date has been the interest rate hikes of recent weeks that have suddenly brought about a radical shift in the country’s borrowing and lending landscapes.
No sector of the mortgage market has gone unaffected by those changes – and in the commercial space, rate increases are having a noticeable impact on borrowing power, according to a renowned mortgage veteran.
Michel Durand (pictured top), chief executive officer at MCommercial, told Canadian Mortgage Professional that a common theme of late had been lenders redoing underwriting on transactions under consideration or up for renewal, with the available loan amount dropping due to that new stress testing.
“[In terms of] refinancing existing properties, but especially all the new construction projects, the biggest challenge in the current market – and it’s going to stay for the next year as rates continue to increase – is dealing with how the rise in interest rates is lowering the ability to secure construction financing as the borrowers have been used to for the last 10 years,” he said.
In the low-rate environment of recent years, borrowers who put around 15-25% of their own equity into financing for multi-unit residential properties were usually able to recover all of that investment upon selling the property, Durand, recent winner of the Broker of the Year – Commercial at the 2022 Canadian Mortgage Awards, said.
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However, those rate hikes mean that borrowers are now having to put more money in – with the end result that they ultimately may not be able to recover that equity. While many builders gravitated away from condos toward multi-unit residential in recent times, Durand said the pendulum could swing back toward the condo market because of further impending rate increases.
“Over the last five years, we saw a significant shift from condos to purpose-built apartments, because we were able to show [borrowers] that they could still recover most – if not all – of their equity,” he explained.
“Staying with the building provided a good return on their investment. Now with the rates going up, all of a sudden those multi-unit builds are not as attractive. I suspect that we’re going to see a shift in the market with fewer apartments being built and going back to more condos.”
Still, Durand said recent changes by Canada Mortgage and Housing Corporation (CMHC) to its affordable housing program had to some extent offset rate increases, even if the full impact of those adjustments would only become clearer over time.
Changes to the organization’s affordable housing policy includes the introduction of MLI Select, a new multi-unit mortgage loan insurance product that allows borrowers to access reduced premiums and longer amortization periods based on commitments to affordability, accessibility and climate compatibility.
CMHC’s president and CEO Romy Bowers said the move was a key step in its bid to ensure that by 2030, every Canadian will have an affordable home that meets their needs.
“That program change that came in March sort of absorbs about half of the market change. The rise in interest rates really lowers your borrowing capacity, but CMHC’s new program compensates [for] a good part of it,” Durand said.
“No new approvals have come out, because it was a program that started in March. It’ll take a while for it to have its effect, and its effect is going to directly impact purpose-built apartments in order to continue to support those.”
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That program would make only a “small dent” against further rate hikes if those increases are large, Durand said – but with the scheme covering every new build, he said CMHC was being “swamped” with requests. “It’s a very good program for anybody who’s got a new project that they’re building or a project that they recently completed.”
Meanwhile, the rapidly changing nature of Canada’s commercial market means that the value of mortgage brokers remains clearer than ever in helping steer their clients through complex and challenging circumstances, Durand said.
“For all the borrowers that are struggling out there, there are good brokers to provide the right solution for them,” he said. “Just going to the bank that you’ve been going to for the last 10 years because you have a good relationship is not a bad option, [but] going to a good broker will give you better options.”
