by Randall Mang, Real Estate Advisor, Engel and Völkers, Saanich Peninsula Specialist –
Since early 2022, a surge in mortgage lending rates has reduced consumer purchasing power and placed a heavier financial burden on homebuyers and those facing mortgage renewal.
While higher rates have intentionally curbed market activity, deals are getting done. What matters most is that borrowers come to the table prepared. Saanich-based mortgage broker Reed Harris of Xeva Mortgage, which serves clients across British Columbia, says despite the interest rate squeeze: “Canadians remain good for their mortgages.”
He says part of the reason the default rate remains “extremely low” (0.15% percent as of August, 2023) is because most mortgage holders renewing today previously qualified at 5.25 percent, due to the stress test. He says most lenders will generally seek to renew an existing mortgage without requiring the borrower to requalify. New buyers, or borrowers who prefer to switch lenders, must qualify at prevailing rates.
While banks and credit unions at the branch level tend to negotiate mortgage rates based on relationships – offering clients varying discounts on posted rates based on loyalty factors – lenders in the broker channel take a different approach.
Harris describes his preferred lenders as lean operators that compete aggressively on rate. “Our lenders compete by presenting their best offers upfront, so we aren’t ‘negotiating’ in the classic sense.”
There’s more to choosing a mortgage than a sharp interest rate, however. Harris says the penalty for paying out a mortgage early or not porting a mortgage warrants attention. “Most borrowers aren’t aware of the pre-payment penalty’s magnitude until they find themselves facing it. Some lenders’ penalty calculation can be triple or quadruple what others charge.”
When it comes to qualifying for a loan at today’s inflated interest rates, Harris says three primary factors come into play: the property price, the down payment and the borrower’s income and relative debt. Harris says reducing debt prior to applying for a mortgage can make a bigger difference than having a slightly larger downpayment. For example, he says eliminating a $500-per-month loan payment would add about $80,000 in borrowing power.
With uncertainty as to whether rates could fall soon or potentially continue to rise, the length of the financing term is a particularly hot topic. Harris says most of his clients are choosing one- to three-year term mortgages to avoid the resulting financial impact should rates rise even higher within those timeframes. Others, who believe rates could soon decline, are choosing variable rate mortgages, which will immediately reflect rate drops and also offer the option to lock in once fixed rates are more palatable.
While Harris admits “It’s less fun to buy or renew at today’s higher rates,” he says: “with some lifestyle and spending adjustments, you can get through.”
