Homeowners should brace for a 45% increase in monthly mortgage payments. 1 in 4 Canadians will have to sell their homes if interest rates go up. Large private mortgage lenders have stopped lending to Canadians altogether. Feeling anxious? You are not alone. Lie down on the couch for this week’s episode, as President of Mortgage Architects, Dustan Woodhouse, joins Matt & Melisa to tackle these troubling media stories head on as well as a more broad-based conversation around the current state of the mortgage lending environment in Canada. A lot has changed in the last few months & there is no one better to break it down for us than the man who oversees more than 2000 mortgage brokers nationwide. Relax. And the tissue box is on the table behind you if you need it!
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Who is Dustan Woodhouse?
I eat, sleep and breathe all things mortgage related. I was a mortgage broker from 2008-2018. I actually started in real estate finance when the market was tanking and the government changed a lot of mortgage rules. It was a challenging time. I made it through that and it seems we’re going into another challenging time.
After 2018, I pivoted slightly and now am the President of Mortgage Architects. We have a team under us that handles about $18 billion in mortgages. We’re growing and trending the right way as a company.
What’s happening with mortgages in 2022? Who should be scared?
The media is doing a great job at making everyone feel like they should be scared. I had a client email me with the subject line, “Mortgage panic!” They told me they were losing sleep at night because of the uncertainty, but their mortgage term isn’t up until 2025. So you know it’s a weird time when people with stable incomes and a steady mortgage payment are in this kind of a panic.
I don’t think anywhere near the number of people who are scared, should be scared. People who feel like they’ll be forced to sell in the next 6-24 months should be cautious. If you bought a few months ago and feel stretched, that could be a problem. But if you bought a few years ago and feel forced to sell, you’ll sell at a profit. So that’s not as scary.
If you’re a first time homeowner and your employment isn’t steady, that could be a reason to worry. But we’re at record employment levels, so there shouldn’t be much concern there. I don’t think many people need to be scared.
On the rental market in 2022:
The rental market is a scary place to be in. If you sell your home and you have to rent, the grass isn’t going to be greener on the other side. The rental market is not going to get any easier. With the latest increase in the stress test, Canadians lost 35% of their purchasing power. So that moved a lot of would-be homeowners into the rental market.
How will rising interest rates affect mortgages?
A lot of people are in a panic when they hear their interest rates are doubling. They assume that means their mortgage payment will also double, but that’s not true.
If the interest rate doubles, your mortgage payment goes up by 25%. And 75% of Canadians are in a fixed rate mortgage, where the increased interest rate won’t affect them for 1-5 years. Many homeowners also forget that while their rate may have gone from 1.5% to 3%, they qualified at over 5% with the stress test.
Headlines say that mortgage payments could rise by 45%. But what triggers that is your interest rate tripling. And that’s just not happening right now, so it’s a non-issue.
If four years from now your 2% interest rate triples and goes up to 6% – and we don’t know if that’s where interest rates will be in 2026 – yes, your payments will go up 45%. But will you conceivably receive a 3% raise per year after taxes? If so, then you’ve just covered the increase. And if you’re not getting that 3% raise, it’s time to talk to your employer.
How do we combat inflation? The best thing to invest in during an inflationary market is yourself. Be better. We are at full employment right now, so the number one fear bosses have is their staff leaving.
What is happening in the Canadian real estate market?
We’ve been hearing in the media about 45% mortgage payment increases, that one in four owners are being forced to sell, and that private lenders are halting lending for mortgages. But let’s dive into the truth behind those statements.
On Canadian mortgage payments in 2022:
We should not underestimate the Canadian propensity to never miss a mortgage payment. For most people, when times are tough, the first payment they skip is their credit card payment. Then they might sell their excess furniture or extra car. Canadians know their mortgages follow them to their graves and will do almost anything to make their payments.
We have a stress test that filters out a lot of people. To qualify for a mortgage, you have to check a lot of boxes. So the “45% mortgage payment increase” headline is designed to create fear. Most people have no reason to be scared.
Are Canadian homeowners being forced to sell their homes?
The stat we saw about one in four Canadian homeowners being forced to sell is not accurate. That number came from asking people how they felt. So one out of four people in April felt they may have to sell if interest rates continued to rise. And here we are in June: Are one in four Canadians selling their homes? They’re not.
Even if you have a variable rate mortgage, for the majority of borrowers you’re not seeing any increase in your payment during your term, regardless of what the Bank of Canada does, because your variable rate is static. The composition of your payment will change – a greater percentage will go to interest instead of principal and the amorization period will extend – but the actual amount coming out of your bank account won’t change.
But even if your payments are changing because your rate isn’t static, let’s look at the numbers. If your household makes $100,000, you will qualify for a $500,000 mortgage. At one point, your payments were $1800 and now they’ve gone up to $2200. But even after taxes, you’re still bringing in over $6000 per month, leaving you $3800+ to spend after paying your mortgage. Plus, you stress tested at a mortgage payment close to $3000. Once you do the math, it’s not as scary.
How do rising interest rates affect housing supply?
Why are interest rates going up? Because of supply chain problems and energy costs. Those things drive up the cost of new construction, which causes projects to be delayed. Major developers are pressing pause, which hurts our housing supply.
But at the same time, we have 100,000 new people coming into BC every year. So where are they going to live? That is going to put upwards pressure on house prices.
In Vancouver, you don’t get off the property train. Even if the train slows down, it never fails to start up again and take off.
Are mortgage lenders not lending money because of uncertainty in the market? What’s the difference between a private lender an a mortgage investment corporation?
A lot of private lending companies have a hard time securing funding because there’s been more demand for mortgages than ever before. So it’s not a matter of halting lending because they don’t believe in the market, but because there’s so much demand they don’t have the money to finance more loans.
There’s a difference between private mortgage lenders and mortgage investment corporations. Sometimes a mortgage investment corporation will pause lending too because their money is all out being used. Again, that’s because demand is so high.
Mortgage investment corporations have boards and regulations with clear policies on renewals and early payments. Private lenders – individuals loaning you money – are the most risky. There’s rarely the level of clarity that’s needed.
The exit strategy is everything, no matter who you’re borrowing money from.
What is happening in the Vancouver real estate market in 2022?
Everything is happening in Vancouver real estate in 2022. There are pockets where properties are still getting multiple offers and selling within a few days. New household formation is still happening and driving parts of the market.
But what’s not happening is people upgrading their housing. That’s why our spring market was a bit cooler. People who are already adequately housed and established are not looking to move into slightly nicer houses anymore. Those people are choosing to stay put and see what happens.
The funny thing is those people probably could afford to move up but they’re so freaked out by what they’re hearing about the real estate market in the media.
Thoughts on real estate and the current market:
I am an optimist and I love real estate. I understand it. And worst case? I can live in it. Real estate isn’t a financial investment the first time around. It’s an emotional investment. When we get a mortgage, we’re placing a bet. We’re assuming we are safe and secure enough in this country to invest and borrow money. Canada attracts the cream of the crop because we are so stable.
When you move onto that second or third property, that’s where things get interesting. Mom and pop landlords are becoming a thing of the past, which isn’t good for our rental stock. So it’s not going to get any easier to buy or to rent. It really comes down to supply, supply, supply.
There are a lot of people who are handcuffed to their property in Canada. They can’t move because they no longer qualify for the property they currently have with the increased stress test. People who have never missed a payment and don’t feel any financial strain are stuck. So that also slows the market down.
The US just raised their overnight rate by 75 basis points and the expectation is that Canada may do the same in July, 2022. How will interest rates change through the rest of 2022? How will rising interest rates affect the real estate market?
A 0.75% hike by the Bank of Canada in July 2022 is imminent. I don’t think we’ll see 0.5% or lower; 75 basis points is almost for sure. But it’s also unprecedented.
Will the July 2022 interest rate hike fix the problem? No. That won’t fix supply chain issues or lower energy prices. Covid created the supply chain issues and the war in Ukraine is causing energy costs to rise. So why do we think interest rates will fix these problems? Well, we don’t.
It seems like the Bank of Canada is trying to shock us into a lack of movement. They don’t want us to go out and bid up the limited supply of things we do have, like cars. And during this pause, they’re hoping the supply chain will fix itself or the war will come to an end.
But an interest rate increase doesn’t affect many of us personally. Most people have fixed rate mortgages or static payment variable rate mortgages. Most people don’t have unsecured lines of credit debt. So who does this really impact?
At some point, those increasing interest rates will grind the economy to a halt. And then we have to decide what’s worse: inflation or a recession? Who cares what the price of gas is if you don’t have a paycheque?
Would you go with a fixed or variable rate mortgage in 2022?
I closed on my current house in December 2021 with a variable mortgage rate of prime minus 1.21%. So my interest rate is 2.49% currently. Sure, I liked being at 1.24% but I’m not losing sleep over 2.49%.
I’m not considering locking in and inflicting a rate hike on myself overnight. I’d rather the Bank of Canada maybe do that to me over time than doing it to myself, for sure, overnight.
I’m actively shopping for a second property in Whistler. If I was closing on that property today, or even July 14th after the next interest rate hike, I would still choose a variable mortgage rate. Life is variable and mortgage should be too! No one knows what is going to happen. I don’t want to get caught with an interest rate mortgage differential.
The penalties to get out of a fixed rate mortgage can be staggering. We’ve learned 6/10 homeowners break their mortgage at an average of 33 months, despite no one thinking they will break their mortgage before the term is up.
My plea to everyone would be: Please stop persecuting yourself about a decision you made yesterday, based on today’s information. You did the best you could with the information you had at the time. We were told by the Bank of Canada that interest rates would be low for a long time, but that clearly hasn’t been the case. So don’t beat yourself up for a decision you made in the past when you didn’t have today’s information.
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