by: Mark Kerzner, President & CEO, TMG The Mortgage Group
Now that the overall mortgage market in Canada has surpassed $2 trillion in outstanding mortgages, there are some really important considerations that we as mortgage professionals must navigate ahead. While inflation is certainly part of the story, there are also some sub-plots to consider.
The robust real estate market of late 2020 through the first half of 2022 was characterized by record-low interest rates, elevated home prices, and record purchase and refinance activity. The latter phenomenon may have temporarily muted some renewal activity for the current year, essentially front-loading it into 2021 and 2022. That said, there are still plenty of renewals reaching maturity in the next 12 to 24 months, and an even bigger percentage in 36 months, especially given many home owners are taking shorter terms in hopes rates will be lower in that time.
The 2018 summer mortgage ‘vintage’ featured fixed rates in the range of 3.25% to 3.50% and variable rates priced at approximately 2.75% to 3.00%. With current 5 year fixed rates in the range of 4.79% to 5.39% and 5.75% to 6.20% for variable, consumers are going to have to navigate what this means for their cashflow and product needs (term, fixed vs. variable, etc.) going forward.
It is important to note that, at least for well-qualified clients, the variance between their existing contract rates and current available rates is not as wide as it was in the fall of 2021 when fixed rates dipped below 2%. That said, it is estimated by the Bank of Canada that fixed-rate mortgage holders will see increases to their rates of approximately 20% to 25% at renewal time. For mortgage customers renewing into ALT-A (near-prime) products, the difference in their contract rate on existing mortgages will likely be even higher.
It is estimated that approximately a quarter of all outstanding mortgages are floating with prime (variable or adjustable). For Canadians who stuck with those products through the Bank of Canada’s past eight interest rate increases and who are reaching maturity, it will be essential that a conversation takes place with a mortgage broker to discuss whether they should stay in a variable-rate product or switch to a fixed, even if the term may be different (i.e., a 3-year vs. a 5-year). It is also vital to determine if clients in a static-payment variable rate mortgage must further increase their payments to bring them back in line with amortization limits.
While rates may be dropping from the peaks reached late last year, the impact higher interest rates are having on inflation is definitely noted. This circular phenomenon means that higher rates and carrying costs, along with higher rents, food and fuel costs, will continue to help keep inflation at higher-than-desired levels (Bank of Canada set a 2-3% inflation target), which in turn continues to keep upward pressure on interest rates. This may result in not seeing the extreme low rates we experienced back in 2021 for quite some time, if ever.
Additionally, some mortgage customers who would have to qualify at the benchmark rate (essentially 2% above the contract rate), may not be able to transfer from their incumbent lender to a new lender at the time of renewal due to their inability to qualify at that higher rate. As such, they may have to remain with their current lender, at the rates offered, and without full flexibility to shop the market.
Notwithstanding that many mortgagors are well-qualified to shop the market, not all lenders are offering their existing clients the most competitive rates at renewal time. There seems to be a growing disparity between the most competitive and higher rates, even in the wholesale channel. This is why it’s imperative to speak with a broker at renewal time.
Seeing a pause in the Bank of Canada overnight rate is a reason for optimism. Add to that we are seeing increased housing activity and some price escalations. The market seems to be more active and solutions are being found for those impacted by higher rates. As home values continue to hold (and even potentially rise), then refinance options may again present themselves in more material ways, allowing Canadians to tap into their built-up home equity.
Given the complexity of the market, the competitiveness of the products and rates, and the large number of Canadians who were previously in variable-rate products, working with a broker to help identify the most suitable product at maturity is now as important as working with a broker at the time you make a purchase.
If you have a mortgage renewing in the next three to 12 months, reach out to a mortgage broker today.