Canada’s mortgage market is feeling the impact of a rapidly evolving economic landscape. Central banks around the world have been cutting rates, and federal housing policies continue to evolve. In Canada, inflation is continuing on its downward trend, easing to 1.6% in September – its lowest level since February 2021 – but consumer spending remains relatively subdued. To stimulate economic activity, it’s likely that the Bank of Canada will continue cutting its benchmark interest rate.
Many mortgage holders renewing in 2024 and 2025 are facing higher rates, contributing to the ongoing increase in mortgage costs. However, those increases are getting smaller as interest rates decline. Canada’s central bank has cut rates four times this year and is expected to announce one more before the end of the year. What economists are wondering is how big those cuts will be. In October, the Bank of Canada followed through with a ‘jumbo’ cut of 50 basis points to 3.75% from 4.25%. Prior to this decision, Bank of Canada Governor Tiff Macklem warned that, with inflation nearing the Bank’s 2% target, more sizable cuts were likely to guard against the risk that the economy is too weak and inflation falls too much. With more reductions expected this year and in 2025, the Globe and Mail is reporting that the central bank’s trend-setting rate could fall to 3% or lower by next summer.
In August, the federal government also introduced mortgage rule changes to allow first-time homebuyers to purchase a new build with a 30-year insured mortgage, an increase from the previous 25-year limit, under certain conditions. The new rules extend the amortization period, giving homeowners five more years to repay their loans. While this effectively reduces their monthly mortgage payments, it also means they will pay more interest over the life of their mortgage. In September, the federal government announced plans to expand these rules to non-first-time homebuyers by the end of the year.
How will these changes impact the mortgage market?
As mortgage advisors, understanding the ripple effects of these decisions on your clients, lenders, and referral partners is crucial. Steeper interest rate cuts could help make the “mortgage renewal cliff” more manageable for current mortgage holders. Homeowners who secured fixed-rate mortgages in 2020 and 2021 have been warned that new rates they would face upon renewal this year and next could result in drastic changes to their monthly payments–but if cuts continue on a downward trend, it could shrink the gap between their new payments and what they’re currently paying.
With continued rate cuts on the horizon, there will be opportunities for many borrowers. Lower than expected mortgage rates could foster a resurgence in refinancing. Homeowners stuck with high mortgage rates could seek solutions to take advantage of declining rates and lower their monthly payments. According to Ratehub, fixed-mortgage rates can now be locked in at just under 4%, compared to around 5.5% a year ago. Identify clients in this situation and reach out to help them understand their options, such as refinancing their mortgage, exploring a private lending solution, or extending the amortization period, where possible.
This doesn’t mean that all borrowers are out of the woods. A borrower who bought their first home in 2020 could have locked in a competitive 1.9% five-year fixed rate with a 25-year amortization period. That same borrower may be able to renew around 3.9% by 2025, which would result in monthly payments around 20% higher. Some borrowers with a variable-rate mortgage would have seen their payments increase and then decrease in tandem with the central bank’s benchmark rate reductions. During the sharp increases over 2022 and 2023, some borrowers may have even seen their mortgage balance grow, as lenders added any interest that wasn’t covered by regular payments to the principal amount.
Another potential pitfall to consider is how lower interest rates will affect home prices across the country. Historically, lower interest rates energize the housing market and increase the demand for homes, which can lead to competition among buyers and higher prices. Lower interest rates will also have an impact on your lenders. As interest rates decrease and mortgage demand increases, traditional banks could tighten their lending criteria as they recalibrate and de-risk their mortgage portfolios.. In some cases, lenders are not offering renewals to current borrowers due to their loan to value or credit history, leaving some borrowers feeling stranded.
For clients locked into a rate near the peak, struggling to meet their current commitments, or relying on credit cards to manage their increased expenses, private mortgage lenders, like CMI, can offer solutions to help borrowers navigate these uncharted waters. Private lending could be a lifeline to borrowers that are underserved by banks and other traditional lenders due to strict lending criteria. Private mortgage lenders tend to be more comfortable with risk because they can look at a borrower’s ability to repay a loan more holistically. For example, if a borrower is struggling to secure a refinance or mortgage renewal with their bank, they may be able to find a private lending solution. Alternatively, a private lender could offer a second mortgage to consolidate a borrower’s other debt and help improve their credit. A second mortgage is also a valuable solution to help homeowners access their home equity without breaking an existing first mortgage and incurring a hefty prepayment penalty.
Guiding your clients through these changes
In today’s shifting economic landscape, understanding the implications of policy changes and rate cuts is crucial for brokers, borrowers, and lenders alike. With the right partners, tools, and knowledge, you can help your clients carefully navigate affordability, interest rate and credit risks, while also exploring opportunities to effectively structure their debt. Help existing clients determine whether a refinance could work for them, or how different solutions could help improve their financial position so that they’re able to get the best possible offers from mortgage lenders at renewal time. Alternative and private mortgage lenders like CMI will be a key tool in your arsenal as clients find themselves in unexpected situations due to the changing environment.
At CMI, we’re proud that our nationwide reach, comprehensive offerings and broker-focused, solutions-based approach make us the preferred private mortgage lender for our broker partners across the country. With access to more than $1 billion in capital, we’re well equipped to help borrowers in any market condition. Reach out to us to discuss how a private mortgage solution can help your clients.
