Rising rates have significant impacts for homeowners. Taking steps to prepare your clients will help to ensure they’re protected – and positioned for success.
In its January 26 meeting, the Bank of Canada provided the surest sign yet that interest rates are headed up – and soon. The Bank left its target rate unchanged in what it called the final step of its exit from emergency policies, effectively ending its commitment to hold its policy rate at 0.25%. With inflation at a 30-year high, many experts are forecasting the first rate increase to happen in March. This provides a valuable grace period to help your clients get ready.
Let’s review the most significant impacts of rising interest rates for borrowers – and what you can do to help protect them.
1. Variable rate mortgages will get more expensive
As interest rates tumbled in the wake of the COVID-19 pandemic, variable rate mortgages surged in popularity – a climb of nearly 150% according to a RATESDOTCA study released in October. Once rates start heading back up, these variable rate mortgage holders will see their payments rise. It may be time to consider locking in, particularly for less financially secure borrowers and those with larger mortgages.
The current spread between fixed (five-year) and variable rates sits at 150 basis points (1.5%). It’s been more than a decade since fixed mortgages cost this much more than variable, but this spread could vanish quickly. Remember that 0.25% is only a minimum increase – the Bank could move by more if inflation is proving to be out of hand. Recall that when rates fell in March 2020, there were three swift decreases to the Bank’s benchmark rate of 0.5% each time.
Now is the time to engage your variable rate clients to see what the impact of rising rates would be based on their own unique circumstances – and make a plan. Be careful not to assume that your clients holding private mortgages are immune from this consideration. While CMI does not offer variable rate products, some private lenders do. Cast a wide net when planning your outreach.
2. Harder to qualify for financing
As interest rates increase, debt payments increase, impacting debt service ratios and making it harder to meet stress tests and qualify for financing. This impacts individual borrowers but also business owners, creating a hurdle for businesses to grow, expand, invest and to hire. But perhaps the group most impacted is first-time homebuyers – a cohort that has already found it increasingly difficult to get a foot into Canada’s housing market. A private mortgage is a valuable option for any borrower unable to qualify with a traditional lender. Already, with soaring home prices and increasingly strict lending guidelines, private lenders like CMI have been a lifeline for many borrowers that have found themselves without other options. This trend is certain to continue.
3. Higher rates at renewal time
Maturing mortgage holders face the risk of renewing at a much higher rate than what they are currently paying. Bank lenders typically allow borrowers to renew 120-days before the maturity date without penalty. Those able to lock in now would be protected against any increases between now and the end of May. Beyond this timeframe, mortgage holders due for renewal may not be able to qualify if they are already at the top end of their debt ratio, as payments will rise.
An early renewal could make sense for those who face the prospect of being unable to afford their payments at renewal time. Inquire about penalties to early renewal and help your clients assess whether it’s worth renewing early and securing a lower current rate. Depending on how a lender calculates the repayment penalty, rising rates could mean declining penalties.
4. Negative impact on credit scores
Rising rates impact revolving debt facilities, such as unsecured and secured lines of credit, which have floating interest rates tied to a lender’s prime rate. Higher carrying costs not only impact cashflow, but higher payments could translate to higher utilization, which can impact a borrower’s beacon score. For those at greatest risk from rising rates, now may be a good time to consider a debt consolidation. In addition to potential interest savings, improved cash flow, and a consolidated payment, debt consolidation has a positive impact on a borrower’s beacon score.
Encourage your clients to get their free credit report from Equifax – and share this link to our blog to help them read and interpret it.
Overall, rising rates are likely to result in further demand for alternative financing as traditional lenders increasingly fall out of reach for many borrowers. Providing access to all the possible borrowing options, including private lenders like CMI, will ensure your clients are well served. Unlike some of our competitors, our rates are fixed so your borrowers are protected from any interest rate hikes. Learn more about the benefits of working with a trusted private lending partner in our blog: Top 10 Benefits of Working With a Private Lender.
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