I had lunch with the mortgage broker I have known for years this past Friday understanding that when people think of business lunches, visions of swanky restaurants, multiple martinis and expense accounts are easy to conjure up. Alas, when you are self-employed, these lunches tend to be all about business and packed with loads of information, insight and discussions about trends happening in the market.
Our broker, Kurt Henry is the team leader at the Mortgage Centre, in Courtice. We have worked together for over a decade and we share many happy clients.
I had a list of objectives for the meeting and Kurt was happy to share them. One of my first questions, one that is top of mind for most Buyers and homeowners, is where he believed the rates would be over the next year. He shared that as rates began to rise in 2022, it was the fixed-term rates that moved first. In fact, from January 20220 to January 2023 the 5-year fixed rates jumped from 2.94% to 5.25%. These increases were a result of the Bank of Canada increasing rates 7 times last year. The interesting point Kurt made was that variable rates were slow to change, however, when they started to move upward, they jumped far faster than the fixed rates. Variable rates started to increase in June 2022 and by January of this year, they were at 6.25%.
We chatted about the “side effects” of rates rising. One of these is how the stress test applies to mortgage qualifications. When you look at variable rates of 6.25% the rate the bank uses to qualify the borrower on is 2% higher, at 8.25%. For fixed term rates a 5-year term the borrower is required to qualify at 7.25%. The difference is vast and one of the reasons variable rate mortgages are less attractive currently. We also chatted about renewing mortgages, self-employed clients and choosing between a mortgage broker and a bank.
For homeowners renewing mortgages, we discussed what options are available and what advice is best given the current mortgage climate. In a nutshell, the answer was “it depends.” If a person has a mortgage renewing in the next 6 months the question comes up, do they stay with their current lender or move to a different one? Moving requires being qualified at the new stress test level along with all of the other hoops banks require a borrower to jump through and the potential of a penalty payment. Staying with the same lender means deciding which term is best. One of the factors I see when a mortgage is renewing is choosing the best payment for the borrower’s situation is critical. The length of the term will determine the payment, with shorter terms resulting in higher payments. We spoke about how rates tend to cycle when they spike up, and my thoughts are the safest term is a 3-year term.
One of the challenges of staying with a borrower’s current lender is that in some cases, banks offer to renew customers at higher rates than other lenders, so looking at alternatives can be a good decision, even if just to help encourage your current lender to match rates.
Buyers who are self-employed have always had a difficult time getting bank financing. Many self-employed people have low personal incomes to help with taxes and at qualification times, this can be a challenge, especially with the stress test being applied to qualifying. The stress test is a Federal mandate and some of the Provincial Credit Unions do not require the use of the test. However, in some cases, they offer the choice of qualifying at a stress test of sorts, in order to obtain a lower mortgage rate. I was surprised that some lenders were increasing rates when quoting on a mortgage for a borrower who they did not require to meet the stress test.
I feel one of my biggest takeaways was the importance of using an experienced Mortgage Broker. Kurt mentioned he had access to over 40 lenders. This benefits the borrower by being able to take the borrower’s situation and shop for the best lender given their circumstances. Not everyone fits into a bank’s criteria, and with so many options the customer can get much better terms and rates using a Broker. Most of the mortgages Kurt places are at no cost to the borrower, Kurt is compensated by the lender directly.
In my 38 years selling homes I had never seen the mortgage rates increase as much as they have over the past year so I felt I needed to look back to see when rates had jumped as much as they have. Some research I did reveal that in the early 1980s mortgage rates increased from 19% to 22% over an 18-month period. When I looked into what resulted from such a spike in rates, I noticed that after the rates peaked, over the next 1 ½ years they returned to where they started, and the values of homes increased dramatically in the last year of the cycle as rates started to decline. This all took place during a 3-year cycle.
As I sit here in February 2023, with the mortgage rates sitting around the 5.5% mark, (historically low rates) and having seen values slip, stabilize and then begin to rise, I feel the next few years will see values increase and rates relax.
The last point we chatted about was the question we get often; “Are we in a Buyer’s or Seller’s market?” The definition of a Buyer’s market is one where the average home takes 4 – 5 months to sell. Currently, in Durham Region, the average selling time is under 2 months. We are still in a very active Seller’s market.
If you are planning a move, or interested in finding out more about mortgage renewals or qualifications, I can be reached at lindsay@buyselllove.ca