Interest Rates Are Rising In Canada
Fixed-Rate Mortgage Sounds Like A Good Idea Now?
For the first time in years, the Bank of Canada raised its benchmark rate from 0.25 to 0.5 percent. Why? To keep inflation under control and cool off the real estate market.
However, the rates are not yet as big as they were before the pandemic. In January of 2020, the rates were at 1.75 percent and were slashed down to 0.25. The rates may go back to what they were before - investors think there could be five more small rate hikes by the end of the year, due to inflation and the Russo-Ukrainian conflict.
The Bank of Canada's rate has a massive role and affects the consumers in a significant way - mortgages, lines of credit and savings accounts might not look the same for some people. For example, this event might push some mortgage holders towards fixed-rate mortgages.
Let's say more increases happen - a mortgage that costs you $1,500 a month now, could cost you more than $1,800 by the end of 2022, due to the rates rising. Does this mean you should switch to a fixed-rate mortgage? Depends.
Even though the rates have gone up, they are still historically low - there is no guarantee they will stay that way. But, variable rates never had any guarantees in the first place.
Also, fixed rates are past their lowest, while the variable ones have just started rising. However, if you are struggling with staying calm each time the Bank of Canada releases a statement and are afraid you won't be able to afford your mortgage anymore - if you can do so, switch to a fixed one. Each person's finances are different, so it's hard to come up with a one-size-fits-all solution. If you're not sure what to do at this time, don't hesitate to give us a call and ask for advice.
There is no doubt that this increase will affect a lot of households that might end up paying hundreds of dollars more for their mortgages. There will have to be a lot of readjusting of budgets, especially for those with other costs of borrowing, like HELOC or other variable rate loans.
Hybrid Mortgages In Canada
The house buying market is hot and heavy and for some people, it might even seem that their own house is way out of reach. That's why it's crucial to know all of the options out there when talking about mortgages and financial obligations. The most important thing when buying your home is planning. How will it affect your monthly finances, how will it change your lifestyle and how will you pay everything off? Those are the questions you must find an answer to before calling the realtor.
When it comes to rates and monthly payments, it's easy to get confused and overwhelmed, especially in the situations we are facing today, with inflation and pandemic recovery.
So, committing to a specific rate doesn't sound appealing to some. And to them, we say - hybrid mortgage. You can benefit from both rising and falling interest rates with hybrid mortgages, as they offer some protection from rising interest rates.
What is a Hybrid Mortgage And How Does It Work In Canada?
A type of mortgage that combines parts of fixed-rate and variable-rate mortgages. You split the mortgage into two parts and each will have a different type of rate. The thing is, the two portions of the mortgage can have independent terms, which might lead to difficulties in switching lenders. For example, if you choose to have a variable rate for two years, but a fixed rate for three. Also, you can choose to have different rates based on the mortgage amount and go halfsies for each part.
With hybrid mortgages, you have multiple components on an approved loan: different rates, different term lengths. But, if you choose to have different term lengths and decide to end the contract at some point earlier than you thought, you will probably be in the middle of the other term which can lead to penalties - since to get out of that one, you have to break the contract. If you manage to match all the terms with the same date, you can avoid the penalties and get out of a hybrid mortgage worry-free.
Pros Of Hybrid Mortgage In Canada
The main benefit of this type of mortgage is having both fixed and variable rates at the same time. That way you stay protected if, for example, variable rates go up a lot. While your variable part might suffer the consequences of higher rates, your fixed part of the mortgage is still intact. On the other hand, if the rates go down, you still benefit from having the variable part. Your monthly amount can be lower if changes in rates happen - you don't have that option with fixed-rate mortgages. With the hybrid model, you can be sure the rates will remain low in a certain time frame.
Cons Of Hybrid Mortgage In Canada
Usually, hybrid mortgages end up costing more than a variable rate mortgage, and the lender has more power over you, as we mentioned above. It can be tougher to go through with an early payoff and it's more possible that you won't pick the most cost-effective option.
The Takeaway
In some cases, a hybrid mortgage is the better option, depending on your preferences. If you're a person that wants fixed-rate security and likes having the same monthly amount for payments, but would also like to benefit from possible lower variable rates, then this option is a good idea. Either way, whatever mortgage you might be thinking of getting, it would be wise to consult a broker. They can give you advice on all of your possibilities and find the perfect rates that would work for you based on your preferences and finance. Give us a try, we would love to hear from you!
Home Renovation Things You Need To Know
Can you borrow money to renovate your home and should you? That is one of the top questions that comes to mind when thinking not only of selling your house but buying a fixer-upper too. The good news, yes you can. Should you? Well, that depends. There are a few things to consider before renovating your home: types of financing, return on investment, your home's value and the insurance policy are some of those things. So, let's start, shall we?
Types Of Renovation Financing Options
In Canada, there are a few financing options when it comes to home improvement: unsecured personal loan, credit card, cash-out mortgage refinancing and home equity line of credit.
Unsecured Personal Loan
With a stable income and a good credit score, you can apply for an unsecured personal loan. All you have to do is agree on a loan term and an interest rate, and the funds are transferred to you in full. You then proceed to make regular payments to the lender until you pay everything off. There is no collateral required and the rates are often affordable.
Credit Card
To finance your renovations, you can use the remaining balance on your credit card. This option is not so common due to the high-interest rates on credit cards, often higher than personal loans. You can do this for small payments, incidentals, or renovations that do not require a lot of work. When deciding whether to use a credit card for renovation or not, check if you can repay that balance in a month. Because if you can't, you will most likely face some big interest bills.
Cash-out Mortgage Refinancing
With cash-out mortgage refinancing, you refinance your existing mortgage for a greater amount than what you currently owe. The difference is paid to you in a lump sum and is up to you to decide what you will do with the money. How much money you qualify for depends on how much equity you have in the home. The longer you own the home, the more equity you have and the more loan amount you can get.
The interest for this option is usually low, and it practically pays for itself IF the renovation is big enough to increase your home's value in the end.
Home Equity Line Of Credit (HELOC)
Taking out a home equity line of credit is another common method of financing home improvements. Here, your home equity is used as collateral for the loan. If you want to qualify for it, you need equity in your home of at least 15 percent, though some lenders require at least 20 percent.
How Much Do Home Improvements Affect Your Home's Value?
Some of the most popular renovations in one's home are connected to bathrooms, kitchens and backyards. Oftentimes, people think getting a pool might increase their homes' value, but in most cases, buyers don't really care about pools, especially in today's market. So, even though having a pool should increase your home's value, it might be harder to sell it. Some resources say that a pool can increase your home's value by less than 2.5 percent, while others will say the increase will be a maximum of 7 percent of your pool cost.
For comparison, a new bathroom might add between 2.5 and 12.5 % in value, while kitchens add up to more than 12.5%. It all depends on the current trends, materials used, style and more. However, there are small renovations that go a long way - a fresh coat of paint comes with the highest return on investment.
What Happens To Your Insurance If You Go Through With This?
While renovating your home might sound appealing, think twice and check the fine print on your insurance contract. In some cases, housing upgrades can affect your insurance policy, depending on the type of renovation you're thinking of having. If you're adding a bedroom or a little studio apartment above your garage, you will need to call your insurance company and talk to them about your new home-worth. More square feet, more money to pay for insurance. With swimming pools, there is an extra 'issue' since with them, come hazardous possibilities like drowning. Some insurance companies might not want to insure your home until you put a fence around the pool, some won't insure it at all. That's why it's important to do your research before applying for a loan.
Renovating a home comes with a lot of dedication and satisfaction, but responsibilities too. Choosing a suitable loan for financing can be hard, which is why you should talk to a professional before taking the leap. Contact us today for some advice!
The Inflation Tsunami in Canada
Things become more expensive than before because of inflation, an important concept for all economies.
Inflation measures how much the prices of goods and services are rising. Many factors are responsible for changing prices. These include the cost of making a product (including raw materials and labour), availability of the product, competition among sellers, and so forth.
Besides, central banks often put economic policies to stimulate economic growth. These policies may also cause inflation. The reason is that when people have a bit more money, their demand for products and services also rises.
They have the means to desire more goods, and when more people in an economy have both the desire and means to go after such goods. These actions cause prices to go up because there’s competition for the few goods available – another economic concept called scarcity.
The Problems that Inflation Causes
Like other countries, the Canadian economy performs best when inflation is stable and predictable. Company budgets often make assumptions about how much the price of supplies, rent, salaries, and other overhead will go up. When these costs rise, companies raise their prices too.
High inflation means prices are climbing quickly (they are “inflated”), and fewer people have as many dollars to afford those goods or services anymore. It means that inflation limits the purchasing power of people. But, higher prices also mean that people buy less, and the economy slows down.
People who have also saved up for retirement will suddenly realize that their money is less than they need to buy as many things or the quality of goods and services they need. Businesses and consumers need to spend time and effort to ensure that rising costs do not affect them too much.
How bad is high inflation?
Sometimes, inflation is so high that the economy is out of control. The economies of Venezuela and Zimbabwe have known economic troubles due to high inflation for several years. According to the International Monetary Fund, in the former case, it was more than 2,800 percent in 2017. It means that a $5 meal one day would cost $445 one year from now. Economists call this scenario hyperinflation.
How about low inflation?
Just because high inflation is terrible doesn't necessarily mean that low inflation is better. Of course, prices are falling, causing demand to go up for those goods affected. When prices continue in a free fall, it shows there are deeper problems within an economy.
People spend less when they have no jobs. Firms will then lower prices in order to boost sales. But, people may prefer to wait a bit, believing prices will keep falling. They create a cycle of saving more money, spending less, prices falling further, and economic activity shrinking.
Using Interest Rates to Control Inflation in Canada
Canadian businesses have enjoyed low inflation since 1991 when the Bank of Canada and the Government of Canada agreed to ensure companies and people can have low, stable, and predictable inflation. Inflation has been close to 2 percent since that agreement.
The BoC’s key to keeping inflation low, stable, and predictable is raising or lowering its key policy interest rate. Therefore, banks increase rates on deposits, loans, and mortgages.
Higher rates encourage saving and make people borrow and spend less. Companies can then slowly increase their prices or lower them to improve demand; this reduces inflation.
On the other hand, lower interest rates can help boost inflation when lower than expected.
All this shows that the economy needs a bit of inflation to be in good shape. It's similar to adding salt or another seasoning to your food. Too much means you can't eat the food, and too little means the food may taste bland. Therefore, using interest rates to control inflation works, but it's a tricky balancing act.
The Coming Canada Interest Rate Hike
Despite keeping them to 25 percent for nearly three decades, economists expect Canada’s top bank to raise interest rates by the end of the third quarter of 2022. Many are even predicting the first hike as early as the end of June.
Brendan LaCerda, a senior economist at Moody's Analytics, believes the Bank of Canada "will raise rates…the elevated rate of inflation is putting pressure on the Bank of Canada and the Fed..." But, he also points out the reluctance to raise interest rates and risk stunting the recovery.
The curious case of Canada's annual inflation hitting an 18-year high has made headlines. In print and electronic media. The middle class knows it would bear much of the brunt, so search phrases like "Canada Interest Rate Hike" and "Inflation Spike in Canada" are now common.
Despite COVID, Canada has maintained a strong economy, but inflation looks set to shatter the 5 percent ceiling, according to ING’s James Knightly.
The Middle Class Always Pays the Price
Inflation, rising prices, and interest rate hikes affect the entire economy. Yet, the middle class seems to suffer much of the consequences.
The catalyst for the rise in the annual inflation rate is partly higher prices for electricity, insurance, and passenger vehicles – general consumer goods.
Even though there’s the possibility of earning more income in this era, the new wave of inflation could make your extra earnings seem like a drop in the ocean.
If the BoC hikes interest rates, it will affect short-term borrowing. Higher interest rates will increase the borrowing rates for consumers, but low rates mean you can reduce the loan principal faster instead of using more of that money to cover the bank's interest.
Conclusion
The coming months will be testy for consumers and the government. Central bank officials will be paying attention to inflation and every movement in price. However, they won’t bother much about prices that are never really stable. They’ll also not pay attention to one-off price changes.
If price changes affect more consumers and linger, they’re likely to push inflation further from the target for a long while. The Bank will do something about such changes so that policy interest rate changes will quickly affect people’s spending, keeping the business climate bustling.
How Divorce Impacts Mortgages in Canada
Divorce is a defining end to what’s supposed to be a beautiful journey in life. According to Statistics Canada, more than one-third of Canadian marriages end in divorce – 70,000 every year. In many cases, however, it marks the beginning of several bitter chapters of contention. Nowhere else is this harsh reality more evident than a mortgage.
Divorce usually involves splitting nearly everything in two – children, friends, and finances. A divorced couple also grapples with how to divide a mortgage appropriately. This exercise is complicated, to put it mildly.
It’s easy to understand why a mortgage is a big deal: a home is the most valuable asset for many couples. As a result, a mortgage is usually the biggest liability they’ll face. So, while they can tell each other it’s over, their debts can bind them together for a long time afterwards.
This article shares essential details of how divorce impacts mortgages in Canada. If you’re on the verge of divorce, you may want to consider, in earnest, what would happen to your family home and, by implication, your mortgage. It's a process that can drain the strongest of us, making it necessary for you and your spouse to agree on what to do about it.
Remember, no spouse can legally sell, lease, or refinance the home without the permission of their [still] significant other. Until there’s legal documentation of your separation, you’re still technically married, meaning you need their permission to buy another property or sell the current one.
Divorce and Mortgage Across Canada’s Provinces
A divorce is an emotional abyss that traumatizes both parties. The paperwork can cause much frustration, and it’s a crucial time to know what’s going on with your finances.
You’ll need all the help you can get as laws governing how spouses divide home equity differ across Canada's provinces. Sometimes, it's several homes involved where the couple shares a cottage or vacation property. Those laws determine who'll leave the table with the short end of the stick.
So, who gets what? In some cases, prenuptial agreements and other assets, such as inheritances, investments, and vehicles, are the deciding factors.
In most cases, homes and mortgages are divided down the middle, and a legally separated couple has the same basic divorce and mortgage options.
Release of Dower Rights
There is a legal statute existing to protect the spouse of any registered owner of real estate. Known as the Dower Act, it requires their consent to finance and sell a piece of property even without their names being on the title.
This spouse protection is available on any real estate that either party has occupied or will occupy while still married. In more straightforward language, if you or your spouse has lived in a property, you may have legal rights to that property even if you're not legally on the title to it.
Lawyers can explain better if you find the Act hard to understand.
How a Divorce Can Impact Your Mortgage
Among other consequences, walking away from a marriage can affect the credit score of you and your spouse. Considering your credit score will help you be financially independent and allow you to own a home by yourself.
In some cases, there may be an agreement to sell the house. Here are a few implications of this decision:
#1 – How much is your property worth?
The common expectation is for you and your spouse to split the asset. What percentage each one gets is strictly the call of the courts, however.
#2 – Penalties
A divorce may happen without concern for the mortgage. Your mortgage lender's policy could mean you'll pay the penalty for exiting the contract early. However, there's the option to redo the contract if your goal is to retain the title minus your spouse.
#3 – Real estate fees
If you're selling the house, probably to buy another one, you should consider closing costs and lawyer fees.
#4 – Pre-approval
Getting a new mortgage means going through another pre-qualification round. It involves assessing your income and what you can afford. Most lenders will ask to see three months of alimony or child support payments deposited to your account before giving your application a look.
#5 – Possible extra expenses
For anyone looking to get a new mortgage, it’s advisable to take the opportunity to access the equity in your property. You could also consolidate high-interest credit card debt.
A gruelling divorce can shift your focus from your finances, but that should never be the case. It’s best to sort out legal documents and address the mortgage; it makes it easier to transition to new beginnings.
Emotions are one reason a divorce can get messy. But, your mortgage and other finances must remain intact. Being proactive about your mortgage can help to protect your credit score.
No one’s in complete control of their finances after a divorce, so working on your mortgage can be essential in keeping your sanity.
What if Your Home is in Negative Equity?
When your home falls in value after you’ve bought it, that’s negative equity. Selling a home that fits this description means you’ll not have enough to pay off your mortgage.
Negative equity is more common after a property price crash. Anyone may experience the bad luck of having it happen around the time of their divorce, making it necessary to do something else instead of selling.
One option is for one spouse to buy the other one out – that is, if they can come to terms. But, this is easier when property prices are low.
Agreeing to sell at a loss means working out a way to share the debt as part of the financial payment.
How does a spousal buyout work ?
A spousal buyout mortgage lets you buy out your partner's equity in your current home and can pay out joint debt. Of course, you become the sole owner of the property.
The home equity is determined by the current value of the home which can be done by a professional appraiser and then you minus the mortgage balance and any penalties that could be associated with paying this mortgage off. Let’s say you have a $300,000 mortgage and the value of the home is $600,000, then you would have $300,000 in equity. If the agreement is to split this amount then the person keeping the home would take out a new mortgage of $450,000. This means $300,000 to pay off the existing loan and $150,000 would go to the spouse coming off title.
If there is little equity in the home and you need to borrow more than 80% of the value of the home, CMHC has a special program that allows you to borrow up to 95% of the house value with a separation agreement already completed. The separation agreement needs to be exact in terms of buyout numbers for the matrimonial home and debts. How much your spouse will receive on the buyout as well as which debt and how much of the debts will be paid out?
- A purchase and sale agreement also needs to be drawn up between the two parties that indicates the current value of the home (which is the sale price) , the exact buyout amount, and any joint debt. Separating or divorce is the only time CMHC will allow you to finance more than 80% of the value of the home after you purchase.Using a spousal buyout mortgage allows you to get mortgage approval up to 95% percent of the value of the matrimonial property. But, here’s what you can pay out with this mortgage:
- You can pay out your spouse’s home equity debt.
- You can pay out non-mortgage debts such as car loans or credit cards accumulated during the marriage.
Including these in a new mortgage means that you’ll clearly state them in the divorce agreement. - You have to pay out the current and existing mortgage on your homes.
- You cannot channel the funds for personal use or at your discretion.
Conclusion
Living expenses are more likely to increase when you live alone. It’s more expensive to maintain a home by yourself. The Wilson Team Ottawa mortgage brokers can help you lighten the strain of divorce.
The Wilson team is especially adept at helping people recover from tumultuous life situations like divorce. They are relentless and successful at helping individuals in difficult financial situations sort out their mortgages.
Get in touch today to ensure that your divorce doesn’t leave you in dire financial straits. Do not get into the wrong product, lender, bank, terms and structure. Call the experts and we will walk you through all of your options and next steps.
Canadians Fighting to Get Mortgage Pre-Approvals
In fear of the low-interest era coming to an end
A lot of people sat back during the pandemic, hoping the house prices will decrease but have since accepted that is not so likely to happen. Most people are afraid to get into the home buying experience and say if interest rates go up, they will not be able to purchase a home. That's why currently, there are a lot of people trying to take advantage of the pre-approvals and not miss out on low rates.
The Canadian Real Estate Association said the national average home price has gone up 13.9 percent. In Toronto, it's even worse. Homebuyers there pay 20 percent more than they did last year. Rate hikes will make this percentage even higher.
It's obvious that sellers are currently at an advantage since homebuyers barely have the opportunity to put in any conditions for a purchase or an offer. Why? It's not just the pandemic - it's a simple supply and demand case. Add up the low-interest rates, immigration, and inflation and you get the perfect storm the homebuyers are currently in.
At this moment, the country's top five banks' rates are between 2.62 percent and 2.94 percent for five-year fixed mortgages, while for the variable ones that number decreases to 1.40 and 1.75 percent. The interest rates have sat at 0.25 percent since March 2020, but as the Bank of Canada has hinted and other economic experts predicted - it could rise as the country loosens the COVID-19 restrictions.
Homes aren't getting cheaper and the people know it. Many housing markets are making it too hard to keep purchase prices down - this being the reason why more and more people are doing their best in finding ways to hold to current rates. One of the ways is getting mortgage pre-approvals and rate holds before interest rates become higher.
Considering how mortgage rates are slowly getting higher, there is a big chance the Bank of Canada will increase the interest rate by more than people expect it, according to BMO Capital Markets senior economist Robert Kavcic who suggested that those with contracts in hand have a bit more time to buy something than those without.
It comes as no surprise that in a recent survey, more than one-third of Canadians between the ages 18 and 40 said that they no longer believe they will ever be able to own a home. The Canada Mortgage and Housing Corporation said that this housing markets situation won't wear off for another two years, meaning that even then, the prices won't come down, they just won't rise as fast.
Adult Children Were Given $10B to Buy Homes
Parents are the primary source of down payments
While Canadian home prices are increasing and becoming less affordable, people are still managing to buy properties - mostly with the help of their parents.
CIBC published a report saying that, in the past year, around 30 percent of first-time homebuyers received financial help from their parents and were gifted an average of $82,000, while mover-uppers were gifted an average of $120,000. During the pandemic, however, the number of families helping out fell among those who had already bought a home before.
Benjamin Tal, Deputy Chief Economist of CIBC World Markets and the author of the report, said that overall, they "estimate that over the past year, gifting amounted to just over $10 billion, accounting for 10% of total down payments in the market as a whole during that period.”
This doesn't mean that parents were going into debt to enable their children their own homes; Tal estimated that only about 5.5 percent of parents in 2020 went into debt to finance the money for their kids' down payments. Most of the gifted money comes from the parents' savings, and while this is a nice gesture, it creates a big inequality between people who can and cannot count on their parents' help.
Homebuyers who received these gifts can cover a big part of their down payment, and therefore have a lower interest mortgage. Oftentimes, having money for a downpayment can make a difference between owning and not owning property, so it's safe to conclude that these gifts aren't doing a favour to narrowing the wealth gaps among young adults.
“Given the trend and the size of gifting, it is clear that this phenomenon is becoming an important factor impacting housing demand and therefore home prices in Canada,” the report said.
The reason behind this could be the sense of urgency parents have when it comes to helping their kids buy a house in the middle of inflation, the current house bubble, and the pandemic.
Eight Things You May Not Have Realized About Reverse Mortgages
You don't actually lose your home
Most common among retirees, a reverse mortgage is mostly used for paying off debt, making renovations or financing health expenses. Since there isn't an obligation to make regular payments with this type of mortgage, a reverse mortgage is often the go-to solution for many Canadians. Even though they're not new in Canada and are, in fact, highly regulated, there still are some misconceptions regarding reverse mortgages we will explain in this article.
You can't apply if you're younger than 62
In Canada, reverse mortgages are available for homeowners who are at least 55 years old. However, the older a homeowner is - the more money they qualify for.
Eviction
Getting evicted if no payments are made is one of the biggest fears and myths out there. With a reverse mortgage, there aren't any regular payment obligations, therefore a payment can't be missed.
Losing ownership
Just like with a regular mortgage, the homeowner has full control of their home. The bank cannot force anyone to sell their home and a person is allowed to live there as long as they wish. The only obligation is keeping the property well-maintained and paying property tax and insurance.
The heirs lose the property
If someone inherited the property under a reverse mortgage, they have the opportunity to pay off the reverse mortgage of the person they inherited it from.
Owing more than the property is worth
As long as the property is in good condition and the property tax is paid, homeowners will never owe more than they should. Coming back to heirs, after the property is sold and the mortgage paid off, they usually end up with more money left.
The spouse has to move out in case of death
The surviving spouse is not forced to move out. There are no obligations to move out or to make payments until they move or sell their home.
It's expensive to arrange
Like with any other conventional mortgage, there has to be a payment for an appraisal of the property. The other cost is the closing fee.
Interest rates are higher than usual
This one is not technically a lie. Since this type of mortgage is not a traditional one, the interest rates can be a bit higher - because there are no monthly payments. Based on their income, a lot of retirees in Canada cannot afford regular monthly payments and therefore cannot apply for a conventional mortgage - so they opt for the one with no monthly payments.
We can help
No one wants to get into something they know nothing about. Before you decide what type of mortgage would suit you best, be sure to do your research first. If you're thinking about going for a reverse mortgage but aren't sure how much it would cost you, try using our online mortgage calculator. Our team is dedicated to changing your financial future and can help you find out what you need. Call us on 1-855-695-9250!
Zero Down Mortgages Could be the Next Big Canadian Mortgage Trend
Experts Warn that Growing Debt Loads Could Lead to Financial Crisis
With the pandemic has driven housing prices to record-breaking highs, a new mortgage trend has some experts worried about the potential implications on Canada's housing market – zero down mortgages.
Often associated with the U.S. financial crash in 2008, zero down mortgages allow borrowers to obtain financing without putting up money of their own for a down payment. They have experienced a resurgence in the U.S and Canada over the past year. The reason for this is that many first time buyers are being priced out of the housing market, and are unable to save for a massive down payment due to skyrocketing rent and home prices.
According to Bloomberg, high-risk mortgages that allow home buyers to borrow the money for their down payment or receive cash back after closing are now becoming the new normal. This, combined with low mortgage rates, has many policy makers and financial experts very concerned about a collapse similar to the 2008 financial crisis.
In fact, in the Bank of Canada's 2021 Financial System Review, policy makers identified the risks of deteriorating mortgage quality.
Fortunately, Canada has regulations in place to prevent most lenders from lending to high-risk applicants. Even still, Bloomberg reports that those considered to be "low-risk" are now taking on larger debt loads than ever before and having little equity to show for it - so much so that borrowers with high loan-to-income ratio now accounts for 17% of new insured mortgages. Two years ago, they only accounted for 6.5%.
According to the Bank of Canada report, this is “the most economically significant factor associated with future financial stress."
It's difficult to say whether this trend will continue, or taper off as the housing market starts to cool. But with inventory increasing and home prices starting to dip across Canada, this is a positive sign of things to come for buyers.
Canadian Real Estate Market "Cooling Off" After Skyrocketing Home Prices
Home Prices Continue to Dip As Inventory Increases
It's been nearly a year and a half since the global pandemic set the Canadian housing market on fire, and buyers are finally seeing a light at the end of the tunnel as prices continue to dip.
According to Canadian Real Estate Association (CREA), home prices in real estate markets across Canada have dropped for the third consecutive month since peaking in March.
While home prices are still 26% higher compared to one year ago – the average national home price is $679,051 – overall, the average home price has gone down by 1.3% since May, and 5.3% since March. For comparison, the average home price was $716,828 in March 2021.
In Ontario, the average home price is $857,754. In Ottawa, the average price is $671,400.
Across Canada, home sales have also dropped by 8.4% since May, as prospective buyers experience "buyers fatigue" due to the intense competition brought on by low inventory, bidding wars, and rising house prices during the COVID-19 pandemic.
Meanwhile, inventory is also increasing, with the the number of newly listed properties expanding by 0.7% between May and June.
While this is good news for first-time buyers who have struggled to enter the housing market this past year, CREA warns that there are still supply shortages in many parts of Canada.
“While the frenzy and emotion of earlier in the pandemic seem to have dissipated for now, the key ingredients of a seller’s market are all still in place,” said CREA’s senior economist Shaun Cathcart, “It’s a long road to get back to normal, and for many housing markets, the main issue is that supply shortages are as acute as ever."