Whether you are facing a renewal in the next 12 months or are considering refinancing your mortgage to consolidate the increased debt load that many Canadians now have due to the higher costs of living, it is in your best interests to discuss your situation with a mortgage professional to understand your options and find the best solution for your unique needs.
As the Canadian mortgage market exceeds $2 trillion in outstanding mortgages, it becomes imperative for mortgage professionals to navigate a landscape marked by critical considerations.
The resilient real estate market, characterized by historically low interest rates, soaring home prices, and unprecedented purchase and refinance activity from late 2020 through the first half of 2022, has undoubtedly influenced the mortgage landscape. While the increase in refinance activity may have temporarily subdued renewal activity for 2023, it is crucial to recognize that numerous renewals are approaching maturity in the next 6 to 24 months with a substantial percentage reaching that
point in 36 months. This trend is particularly notable as homeowners opt for shorter terms in anticipation of potentially lower rates.
For well-qualified clients, the gap between their existing contract rates and the current available rates is not as it was in the fall of 2021 when fixed rates briefly dropped below 2%. However, projections from the Bank of Canada indicate that just about every mortgage holder can anticipate rate increases resulting in payment increases of approximately 20% to 25% at the time of renewal over the next 2 years. Those renewing into ALT-A (near-prime) products may experience an even more significant disparity in their contract rates on existing mortgages.
Approximately a quarter of all outstanding mortgages are floating with prime (variable or adjustable) rates. Homeowners who have weathered multiple interest rate increases by the Bank of Canada and are approaching maturity must engage in a conversation with a mortgage broker. This discussion should explore whether they should maintain a variable-rate product or transition to a fixed-rate, even if the term differs (e.g., 3-year vs. 5-year). It is also crucial to assess whether clients with a static-payment variable rate mortgage need to increase their payments to align with amortization limits.
While interest rates may be starting to decline from the peaks of the previous year, the impact of higher rates on inflation remains evident. This cyclical effect contributes to sustained inflation levels, influenced by higher rates, carrying costs, as well as increased rents, food, and fuel expenses. This situation may prevent a return to the extremely low rates experienced in 2021 for an extended period, if at all.
Furthermore, some mortgage customers, who would have to qualify at the benchmark rate (essentially 2% above the contract rate), may face challenges transferring from their incumbent lender to a new one at renewal due to their inability to qualify at the higher rate. Consequently, they may need to stick with their current lender, accepting the offered rates without the flexibility to explore the market.
Despite the capability of many mortgagors to shop the market, not all lenders provide their existing clients with the most competitive rates at renewal time. A growing discrepancy between the most competitive and higher rates, even within the wholesale channel, underscores the importance of consulting with a broker during renewal. The recent pause in the Bank of Canada overnight rate offers a glimmer of optimism.
Given the intricacies of the market, product competitiveness, and the significant number of Canadians previously in variable-rate products, partnering with a broker to identify the most suitable product at maturity is now as crucial as seeking their expertise during the initial purchase.
If you have a mortgage renewing in the next three to 12 months, feel free to reach out to me today for personalized guidance.