One of the World’s Frothiest Housing Markets Turned Into a Seller’s Headache Overnight

House hunters from Toronto to small Ontario suburbs are changing how they navigate the tight housing landscape with interest rates heading higher.

A string of central bank interest rate hikes has flipped the switch on Canada’s white-hot real estate market, spurring the first national home price decline in two years. That has both buyers and sellers in some of the frothiest pockets scrambling as they try to navigate an unusually rapid shift in the country’s housing landscape.

In some cases, people are turning to high-interest bridge loans to get themselves out of tough situations, according to Bruce Joseph, founding director of Trident Mortgage Investment Corp. His alternative lending firm, based in Barrie, typically serves a niche market of high networth business owners who can afford to pay interest rates around 7% for financing tailored to their needs. Now that borrowing costs across the board are up — the average of major banks’ five-year mortgage rates runs at 5% — some people who already bought new homes are struggling to offload their old ones. That’s when they turn to alternative lenders like Joseph:

“I think we have a group of people that kind of got caught with that market turning,” Joseph said. “We just came out of a very aggressive sellers’ market, and moved very quickly into a buyers’ market, so their strategy made a lot of sense until really the last several weeks.”

Cooling Market

Several Ontario cities saw price declines last month.

They’re not the only ones getting caught by the sudden shift. Mom-and-pop real estate investors in some places have seen their prospective margins from new purchases evaporate with the rise in borrowing costs, potentially sidelining a source of demand that came to account for a fifth of the market nationally through the pandemic.

And those who took out shorter-term subprime mortgages — which account for 1.3% of Canada’s loan market — now face the prospect of having to refinance at double the cost. That could introduce forced sellers and distress to the market.

Whether it all amounts to Canada’s long housing boom facing just another dip or something more severe will depend on how many people find themselves in trouble, and whether that trouble develops a momentum of its own. So far, the sudden market shift has been uneven, with places that saw less extreme run-ups holding onto their gains or even strengthening, while the cities and towns in Ontario that were at the forefront of the pandemic boom are suddenly tumbling.

“The demand fever in Canadian housing has broken,” Robert Kavcic, a senior economist at Bank of Montreal, wrote in a note Monday. He says there could be a 20% drop from peak values in some of the markets that saw the biggest gains the last two years.

“Let’s say that we’re just getting started,” he wrote.


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Take these steps to ensure you're truly ready to pay for a mortgage

Many people aspire to be homeowners, but since it’ll likely be the most significant financial decision you’ll ever make, it’ll take careful consideration. You need to ensure you take the proper steps to put yourself in a good position to buy.

1. Have steady income

Unless you have a ton of cash on hand, you’ll need a mortgage to buy a home.

Whether you’re a full-time employee or freelance, how much of a mortgage you’ll qualify for depends on your income. Generally, the more you make, the more you’ll be eligible for.

Generally, lenders want to see that you’ve had a job with the same employer for at least 12 months. This is important to lenders because they may not want to take a risk on someone that just got a new job and has a chance of not passing the probation period. Having steady employment gives lenders peace of mind.

In the case of freelancers, small-business owners or self-employed individuals, lenders want to see consistent income. They would qualify you based on the income listed on your CRA notice of assessments from the last two to three years.

2. Improve your credit score

Your credit score is listed as a number between 300 and 900. The higher your number, the more creditworthy you are. This number matters a lot to lenders since it’s a quick way to determine how likely you are to repay loans.

If your credit score is in poor standing (below 660), you may have difficulty getting approved.

Lenders may see you as a risk. They may deny you loans, or only be willing to provide you loans with unfavourable terms, such as a high interest rate.

Before applying for a mortgage, try to improve your credit score by paying down debt and limiting your credit usage. Keep in mind that your credit score won’t improve overnight. A meaningful increase may take months or even years.

3. Save for a down payment

You need to have a down payment to qualify for a mortgage when buying a home. How much you need will depend on the purchase price of your home.

  • $500,000 or less purchase price – 5 per cent down payment required

  • $500,000 to $999,999 purchase price – 5 per cent down payment required for the first $500,000, 10 per cent for the portion above $500,000

  • $1 million or more purchase price – 20 per cent down payment required

Any mortgage with less than a 20 per cent down payment is considered a high-ratio mortgage. A high-ratio mortgage would require you to get mortgage default insurance, which is 2.8 per cent to 4 per cent of the mortgage amount.

Saving more money, ahead of house hunting, means your monthly payments will be lower. However, when real estate prices rise, your savings rate may not outpace the year-over-year increases.

4. Become familiar with government incentives

A few different government incentives can help first-time home buyers achieve their goals.

The Tax-Free First Home Savings Account (FHSA) is being introduced in 2023 and is arguably the biggest help. Those looking to buy a home can contribute $8,000 a year to their FHSA, up to a total of $40,000. Contributions provide a tax deduction and any interest or capital gains earned are tax-free.

There’s also the Home Buyers’ Plan (HBP) that allows you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) for the purchase of your first home. This applies to each buyer, so couples buying together could access up to $70,000. If you use the HBP, you need to repay what you withdrew over 15 years.

Another program to consider is the First Time Home Buyer Incentive (FTHBI). With this program, the government will provide you with up to 10 per cent of the purchase price. This would increase your down payment amount, which would lower your monthly payments. However, the government would take a share of your home’s equity. For example, if the FTHBI provides you with five per cent of the down payment, the government gets five per cent when you sell your home.

5. Get pre-approved for a mortgage

Getting pre-approved for a mortgage is arguably the best way to prepare for homeownership. During this process, lenders would formally run your numbers and verify your details. They’d look at your income, down payment, credit score, outstanding debt, and more.

Based on that information, they’d be able to provide you with an amount and the interest rate for a mortgage. This is vital as you’ll now know exactly how much you’ll be able to afford. Best of all, lenders can typically hold the rate offered for 90 to 120 days, so you can search for a home within your budget knowing that you have the financing secured.

It’s worth noting that a pre-approved mortgage is different from a pre-qualification. With a pre-qualification, lenders aren’t verifying any of your information. It’s simply a quick way for them to tell you how much you’ll roughly be approved for. Since pre-approvals are more formal, you’re getting a guarantee that the funds will be made available to you.

6. Create a realistic budget

Getting pre-approved for a mortgage is great, but it doesn’t factor in every expense. Therefore, it’s a good idea to create a budget that factors in all of your expenses and goals. For example, you may want to include the cost of raising children, vacations, and retirement savings.

By factoring in these expenses in advance, you can budget accordingly. That might mean that your actual maximum affordability is below how much your lender is willing to provide you in the form of a mortgage.

Remember, mortgage lenders only calculate things on the basis of whether you can make your monthly mortgage payments. They’re not considering any other goals you have. The last thing you want is to be house poor.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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