Prominent executive on the impact rate hikes could have on the mortgage and housing front
No interest rate increases were included in the Bank of Canada’s opening rate announcement of the year – but they’re on their way, the central bank indicated.
With its next statement pencilled in for early March, a policy rate hike at that time is all but inevitable, according to observers including Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal.
Not only will variable mortgage rates climb in line with that benchmark Bank of Canada rate; fixed rates have also been on the rise in recent months, signalling that the record-low-rate environment of the COVID-19 era could be coming to a close.
That could have some cooling effect on Canada’s housing market – although it’s unlikely to precipitate any kind of crisis, according to a leading industry executive.
Steven Tulman (pictured top), president and broker at the Mississauga, ON-based Clover Mortgage, told Canadian Mortgage Professional that it would likely become more difficult for would-be homebuyers to secure a mortgage because of a probable higher qualifying rate.
“A rate increase can potentially slow down this incredible growth that we’ve been experiencing across Canada in real estate markets,” he said.
“In theory, it should make it harder for people to qualify for mortgages on homes since the mortgage stress test will likely increase. [However] I don’t see anything catastrophic happening. I don’t feel like the Canadian government will allow that to happen and will step in if needed.”
Rate hikes could see triple-A lenders, such as mainstream banks, become increasingly out of reach for many prospective buyers, Tulman said – a development that may push many borrowers towards the alternative space to service their mortgage needs.
That could result in an upsurge of business for alternative-A lenders, B-lenders such as trust companies and credit unions, and private lenders in the near future.
“As we continue to see home prices keep growing, even without interest rate increases, we’re already seeing a larger shift to alternative lending,” he explained.
“We’re seeing that it’s getting harder and harder for triple-A institutions to give homebuyers the money that’s needed to purchase these more expensive properties.”
Indeed, Tulman said that trend is likely to continue – unless the government steps in with measures that allow banks and other triple-A lenders to offer amortization periods significant enough to counter price growth and interest rate and stress test increases.
“Reintroducing the 40-year amortization as an option for borrowers in the triple-A lending space will make a big difference to many homeowners and homebuyers,” he said.
Rising rates and a heightened stress test would likely represent grim news for first-time homebuyers, a segment that’s faced increasing challenges entering the mortgage market in Canada in recent years.
As house prices have continued to skyrocket across the country and competition intensified in Canada’s hottest markets, many prospective entrants to the market have found themselves disillusioned and jaded by the process of purchasing a home.
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In 2019, those buyers saw the federal government introduce a measure aimed at easing their path to homeownership, the First-Time Home Buyer Incentive.
That program arrived in the form of a shared-equity mortgage in which the government offered a contribution toward a home purchase in exchange for a shared investment in the property.
Reception among the mortgage community to the measure has been decidedly mixed, with some describing it as a well-intentioned program that missed its mark.
Others said that they had seen little uptake in the program among clients – either because they couldn’t qualify, or disliked the shared-equity model.
Tulman said that while the idea was a good one, it suffered from two main challenges: firstly, that it doesn’t offer enough financial support for homebuyers given the high pricing in the current market, and secondly that recipients are required to repay not only the principal, but the overall growth percentage of the property at time of repayment.
“For instance, if they took $30,000 from the government and they sell the property after it appreciates 100% in value, that means that they now owe the government $60,000,” he said. “For many homebuyers, that seems like a big amount to pay back.
“If the government caps that percentage of growth, this will make the incentive more attractive and feasible to these first-time homebuyers.”