Interest rates will continue to be a major deciding factor in the Canadian housing and mortgage market through the rest of 2024 and into next year. Officials at the Bank of Canada appear to be showing signs of confidence that inflation is simmering down, which could mean interest rate cuts in the coming months. In the April 10 interest rate announcement, the central bank warned, when cuts do happen, it will be gradual. While mortgage rates are expected to start lowering soon, borrowers that locked in fixed rates at record lows are approaching the end of their loan term—and now, many of these borrowers will need to renew at a much higher rate.
With many homeowners feeling antsy about these upcoming renewals, it’s a good time to reach out to existing clients to check in on how they’re feeling and the state of their personal finances. And, with a growing number of Canadians seeking guidance from mortgage professionals like you to navigate the market and find the right financing solution for their needs, this blog provides an overview of the current economic landscape to help you find new opportunities.
An overview of the housing market
This elevated interest rate environment and uncertainty in the economy has kept many homebuyers on the sidelines in the first quarter of this year, but sentiments are changing. According to the Canadian Real Estate Association (CREA), confidence appears to be returning to the market. CREA reported a significant jump in listings at the start of April, which could signify a more active spring market.
However, home sales and prices were mostly unchanged on a month-to-month basis in March 2024,with national home sales up 0.5%. While the housing market could pick up this year, CREA notes that it’s still to be seen how buyers will respond to new properties up for sale.
CREA senior economist Shaun Cathcart questioned, “will the story be high interest rates keeping a lot of people on the sidelines this year, or the much expected and anticipated first rate cuts enticing a lot of people back into the market? Probably a bit of both.”
What’s happening in the mortgage market?
Similarly, Canada’s mortgage market is navigating a particularly tough economic environment. According to data from the Bank of Canada, 80% of all mortgages outstanding as of March 2022 are coming up for renewal in 2024, which accounts for approximately $250 billion in mortgages. Next year, another $350 billion in mortgage renewals is expected. For these homeowners, monthly mortgage payments could be increasing by hundreds of dollars.
Even when the Bank of Canada decides to gradually begin to cut interest rates, it doesn’t mean that Canadian borrowers are off the hook—many will be paying a higher mortgage rate.
The Bank of Canada projects that all outstanding mortgages will see a median monthly payment increase of 34% by 2027. This means the median monthly payment will increase to $1600 (from $1200 in February 2022). The central bank also noted that borrowers with variable-rate mortgages have already started feeling the impact as rates escalated. These borrowers have seen median monthly payments increase by 70% compared to February 2022.
Where does private lending come in?
In addition to this sticky situation that Canadian homeowners are facing, new and existing borrowers continue to be challenged by strict qualification rules at banks and other traditional lenders. As a result, demand for private lending will continue to grow and encompass a larger share of the mortgage market.
Private mortgage lenders like CMI can offer alternative mortgage solutions to support the growing cohort of borrowers that don’t meet prime lending qualifications. While CMI constantly monitors the market to ensure appropriate and responsible lending, every deal is considered on a case-by-case basis. It’s important to us that every borrower is matched with a suitable solution and has a sound exit strategy in place.
CMI takes a common sense approach to a borrower’s income and their ability to repay.
In today’s economy, many borrowers can’t maintain a gross debt service ratio (GDS)—expenses like mortgage payments, property tax, maintenance fees—and total debt service ratio (TDS)—other costs such as credit card payments, personal loans—that banks would accept. Where borrowers are turned away based on these ratios, private mortgage lenders can look at other factors, including the bigger story behind the numbers, to create a solution to support the client. They can also consider income from gig work and other non-traditional employment types that fall outside of B20 lending regulations.
As rate cuts are expected in coming months, private lending can also act as a bridge to help borrowers that don’t want to lock in another long-term fixed rate mortgage at peak rates. Private mortgages typically range from six months to three years, and it’s possible to negotiate custom term lengths if needed. A short-term second mortgage can also provide borrowers in a tough spot with the cash flow needed to bring a first mortgage up to date to avoid foreclosure and keep a borrower in their home. It’s also a valuable alternative to refinancing an existing first mortgage to avoid potentially steep repayment penalties. Private lenders can also provide access to financing for things that a traditional lender won’t, like paying off CRA tax arrears.
In addition, with record high household debt across Canada, borrowers can use private lending in the form of a second mortgage to help consolidate their debt to get back on track and prepare in advance for increased monthly mortgage payments. Second mortgages generally have lower rates compared to credit cards and personal loans and can help homeowners save on interest and annual fees.
How CMI is responding to the environment
CMI is your private mortgage lender in any market condition. In recent months, we have taken a more conservative approach to LTV in certain markets, and shortened timelines on appraisals to ensure the most accurate and updated values. We’ve also placed a stronger focus on affordability to ensure borrowers can demonstrate a strong ability to repay. As always we want to ensure every borrower is placed into a suitable solution, is well positioned to manage it and has a sound exit strategy in place.
At CMI, we pride ourselves on our relationships with broker partners. We connect with brokers and borrowers 60 – 90 days ahead of a mortgage maturity date so that all parties have enough time to ensure that they’re on track with the exit strategy or to explore other options.
CMI is here to help and to ensure brokers are equipped to provide the full spectrum of private mortgage lending options to their clients. With access to more than $1 billion in capital, partner with CMI today and see why we’re preferred by brokers across Canada.
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