Past challenging markets can serve as a guide, suggests prominent industry VP
Canadian borrowers continue to navigate a challenging and often stressful mortgage environment – but brokers can draw on the experience of past markets to help guide their clients through tough times.
That’s according to Susan Thomas (pictured), executive vice president of network development at M3 Elite, who told Canadian Mortgage Professional that lessons learned during times of high interest rates in the past could prove an invaluable asset to mortgage advisors in the current market.
While soaring interest rates over the last 20 months have squeezed the budgets of scores of borrowers and homeowners across the country, today’s higher rates are far from unprecedented.
Thomas, an industry veteran of more than 35 years, told CMP she recalled sitting with clients in 1994 and urging them to lock in a five-year mortgage at around 7.5%, then viewed as an extremely low rate.
Dealing with prolonged high-rate environments brought many lessons brokers can draw upon at present – not least the value of making sure clients understand amortization tables and different options.
“We haven’t seen interest rates like this for a long time and, while the house-to-income ratio is very different today, some of the fundamental advice is still the same,” Thomas said. “To review that advice may be helpful for industry professionals who are not used to having discussions with clients around higher rates and affordability.”
Canada’s unemployment rate rose to 5.8% in October in a further sign that the economy is continuing to feel the impact of interest rate increases by the central bank.— Canadian Mortgage Professional Magazine (@CMPmagazine) December 4, 2023
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How brokers can help borrowers navigate the current market
In that high-rate environment, one of the best places to start is amortization, Thomas said – particularly because when higher rates prevail, small changes to payments have a much bigger impact over time.
She gave the example of a five-year term at 2.89% on a $500,000 mortgage and 25-year amortization, on which the borrower would save $24,000 over the life of the mortgage if nothing else changes by switching to biweekly accelerated payments.
On the same mortgage with a 5.89% rate, that switch would save over $82,000 across the life of the loan, Thomas said, also allowing the client to pay the mortgage off early and give valuable time to finance retirement, upgrade to a larger home or buy a second property.
“People haven’t scrutinized the effects of doing biweekly accelerated payments right at the beginning of the mortgage in a while,” she said. “It is important, because so much more of your payment goes out to interest initially.
“For the example I just gave, it takes 10 years before the principal payments exceed the interest. It’s all front-end loaded. So even if it’s $20 a month, putting more down on your mortgage right away when the interest rate is higher is impactful.”
Cashflow remains a top concern of squeezed borrowers
As borrowing costs continue to surge, homeowners and prospective buyers are taking a close look at their cashflows in an effort to reduce unnecessary costs and peripheral expenses. Thomas highlighted the “phenomenal” tools available on the Canada.ca website including a comprehensive cashflow tool brokers can use to sit down and discuss cost reduction measures with their clients.
Meanwhile, with interest rates also higher on the other side of the balance sheet, there’s potential for brokers to explore opportunities with prospective future clients – for instance, young adults up to the age of 35, of whom 35.1% still live at home, according to StatCan.
“Have adult children who are living with parents do a cashflow analysis too,” she said. “Are they living at home rent-free? Can you try to mimic what it would be like to have mortgage payments?
“Could they save as much living at home and take advantage of some of the government incentives such as the First Home Savings Account and the Home Buyers’ Plan? There is great opportunity there for compound growth within those programs.”
Conveying that experience of working with turbulent markets in the past can set clients’ minds at ease, Thomas said, particularly when those customers are unaccustomed to that type of uncertainty.
“The other thing I hear is that people are panicking when their home isn’t selling in a couple of hours,” she said. “I remember working when 90 days on the market was pretty normal. Managing your clients’ emotion is important.”
While these are trying times for Canada’s mortgage market, Thomas emphasized the importance for brokers of staying the course and getting back to basics in order to set themselves apart as a trusted source of guidance and wisdom.
“Clients are scared right now, and frightened about the uncertainty,” she said. “So reassure them and say, ‘Yes, we’ve been here before. We will get through this. But it takes a plan, and I’m a professional to help you with that.’
“I think that goes a long way. I think one of our main jobs right now is to manage expectations, whether It's how long your house would be on the market if you’re selling it, how you know what’s going to happen if you increase your amortization, what’s going to happen when your mortgage comes up for renewal and all of a sudden your payment has doubled. It’s managing those expectations with people.”