For more than a decade, the biggest financial hurdle for many homebuyers in expensive markets has been coming up with cash to make a down payment. But with borrowing costs rising rapidly, being able to afford mortgage payments is increasingly becoming an additional hurdle.
The monthly payment for a new mortgage on a typical home in Canada increased by about $800 a month between October and April, according to a recent analysis by Ben Rapido, founder of research firm North Cove Advisors.
Mr. Rapido, who estimated the monthly payments based on the national standard home price, which is a 20 percent down payment, 30-year amortization and average fixed and variable mortgage rates available nationwide.
“The first question we like to ask our clients when they pre-qualify for a mortgage — before giving them an amount — is what is a comfortable repayment within their budget,” said Francis Hinojosa, a Toronto mortgage broker.
Worry, buyer’s remorse is high as the property market slows down
These days, it is very important for homebuyers to have strong control over their monthly budget and how new mortgage payments will affect their cash flow, especially as inflation continues to drive up prices for daily necessities, said Ms. Hinojosa, founder and CEO of Group Tribe Finance.
This is a very different conversation from the one Ms Hinojosa had with clients in 2021 and the second half of 2020, as ultra-low interest rates helped drive property sales and home prices to dizzying heights in the shadow of the pandemic. At the time, she remembered, her clients were mostly focused on getting the lowest possible mortgage rate and jumping into the market before real estate values fell beyond their reach.
It’s not a question of mortgage rates approaching their highs in the late 1980s. Five-year fixed rates are currently in the 4 percent range, with five-year variable rates still in the 2 percent range.
The problem, said Rapido, is how quickly prices are rising. He noted that increases in the mortgage rate of just two or three percentage points mean much larger mortgage payments when combined with record home prices.
When looking at affordability measured as the affordability cost of home ownership compared to income, conditions in late 2021 were rapidly approaching those seen in 1990. Detached home ownership costs then reached a record high of 58.5 percent as a share of the median Household income, according to RBC’s Housing Affordability Scale. By comparison, in October of 2021, individual home ownership costs accounted for 54.6 percent of median household income.
With interest rates rising, why are so many borrowers still choosing variable rate mortgages?
The RBC scale measures the percentage of average pre-tax household income required to cover mortgage payments and other property costs based on a 20 percent down payment, 25-year amortization, and a five-year flat rate.
With current trends, the market could “certainly” reach the height of the affordability crisis in 1990, according to economist Robert Hogg, who wrote the RBC report on housing affordability.
“It will depend on how quickly the prices respond,” he added. “If we see a material correction in a short time, it may partially offset the impact of higher mortgage rates.”
However, he noted, the overall national picture is skewed in southern Ontario, which has seen the worst pressures on affordability. Buyers in Vancouver and Victoria, where mortgage volumes are well above the national average, are also acutely feeling the impact of higher mortgage rates, according to Mr Hogg’s recent housing update.
Mr. Hogg noted that affordability was eroding rapidly in Halifax, where house prices bucked the national trend and continued to rise in April. However, home transfer costs in Atlantic Canada have remained relatively reasonable compared to other markets, he added.
The same is true for the prairie, although prices have been rising rapidly in Calgary and Edmonton over the past several months, he said.
In Toronto, Ms Hinojosa said the priority for aspiring homeowners, beyond a tight budget, should be to explore all mortgage rate options.
While Canadians have traditionally gravitated toward five-year periods, some buyers in this market may find a better fit for short-term fixed rates, which could allow them to weather the current wave of interest rate increases without committing to a relatively higher rate. She said for five years.
Ms. Hinojosa found that buyers are unusually receptive to the idea of thinking about something other than the five-year period.
“They’re more curious and more open.”
Are you a young Canadian and have money on your mind? To set yourself up for success and avoid costly mistakes, listen to our awards Stress Test Podcast.
Be smart with your money. Get the latest investment insights delivered straight to your inbox three times a week, with Globe Investor’s newsletter. Register today.