Is the mortgage landscape changing for new buyers?

For those Canadians seeking to enter the housing market, the past month may have felt like a perfect storm: weeks after the Canada Mortgage and Housing Corporation (CMHC) placed the market in its highest possible risk category, Statistics Canada announced that the year-over-year inflation rate in Canada had reached 4.4%, its highest rate since 2003.

With speculation mounting in the wake of that StatsCan announcement that the Bank of Canada might move quicker than planned on interest rates to stave off the inflationary risk, it seems that there’s no end in sight to the increasingly complex set of circumstances faced by would-be buyers in the current market.

Despite concerns expressed by clients over the prospect of rising interest rates in the near future, Nick L’Ecuyer (pictured), president and principal broker at the Ontario-based Mortgage Wellness, told Canadian Mortgage Professional that it was important to realize any rate movement would be from the record-low levels they’ve trended at throughout the pandemic.

“Rates shift every day. Of course they’re going to trend up over time – they’re at their lowest level in history,” he said. “That’s the concern from consumers: interest rates. It’s not value, price or inflation.”

Read next: Will inflation force the Bank of Canada’s hand on interest rates?

While variable-rate products have seen a surge in popularity throughout the COVID-19 pandemic, L’Ecuyer noted that fixed-rate options remained a highly popular choice for his clients, the majority of whom valued the reliability and predictability that those products offered in uncertain times.

“We help families, and those families are often looking for stability,” he said. “When we show families a very stable mortgage plan that includes a fixed interest rate, I think that helps with their [perhaps] uneasy feeling about potential interest rate increases, or potential inflation issues.”

The prohibitive penalties associated with fixed-rate mortgages are sometimes cited as a reason to opt for a variable-rate choice, with the latter normally offering more leniency for borrowers who break their mortgage.

Nevertheless, L’Ecuyer said that that’s not necessarily always the case, pointing out that many lenders will offer conditions that aren’t overly punitive in the event that a borrower can’t fulfil the full term of their mortgage.

“The right monoline lender will have really good, fair penalties where the client’s not paying $20,000 or $30,000 to break a fixed-rate, heaven forbid something changes in their life,” he said.

Unsurprisingly, many current homeowners are content with surging house prices, having purchased for a certain amount only to see their property’s value skyrocket as demand climbs rapidly.

“Someone who is currently in a home and watching the value of that home increase is happy,” L’Ecuyer said. “They purchased the home for, say, $600,000; if you checked in with them five years later on renewal, their house is worth $1 million and now it’s been hyperinflated to, say $1.3 million.”

For new entrants, the situation is altogether more complex. While that CMHC pronouncement on a potentially overheated market and the country’s inflation predicament have grabbed headlines in recent weeks, one unwelcome market factor that’s been present throughout the pandemic shows little sign of slowing down: the prevalence of subject-free offers.

Read next: Variable rate mortgages – what's in store?

With lack of inventory and still-strong demand across Canada, bidders continue to waive conditions on their offers, a trend that L’Ecuyer emphasized is risky for both seller and buyer alike.

“I still think that there are great deals in this market, and I think that buyers just need to be really aware of their surroundings and act without emotion, because a balanced market where there are conditions on offers is what everybody wants,” he said.

“Let’s say I’m buying your home; even you as a seller want me to have conditions. You want to make sure that it’s thoroughly vetted, that I had some time to get my financing in order, to have done a home inspection, and [for me to be] really confident that I’m going to be closing on your house.”

The value of starting the process as early as possible – providing documents up front and having everything in order for the lender – is clear, said L’Ecuyer, with caution and prudence also essential components in any approach to the current market.

“In this environment – price and inflation aside – everybody should be acting with caution from that conditional perspective,” he said. “Would I still be a buyer in this market? For sure. But not without caution.”