Reza Ghazi is CEO of GreenFlow Financial Corp., overseeing the company’s operations and growth strategies.
The Bank of Canada (BOC) has implemented a series of policy interest rate cuts since June 2024. In the last quarter of 2023, the policy interest rate, also called the target overnight rate, was set at 5%. A year later, the BOC cut the policy interest rate by 175 basis points to 3.25%.
Interest rates significantly impact the mortgage industry, among other factors. As an economic tool to combat rising inflation rates, the policy interest rate gradually increased from 0.25% in March 2020 to 5% in December 2023.
The current 3.25% rate has resulted from a gradual decrease as the inflation rate, which reached an 8% high in 2022, stabilized around the 2% target rate in 2024. The inflation rate, measured by the year-over-year change in the consumer price index (CPI), was 1.6% in September, a slight decrease from the 2.0% rate in August 2024, then returned to 2.0% in October.
Canadians still feel pricing pressures across most sectors despite the decrease in the inflation rate. Affordability in the real estate market has mostly stayed the same, as housing prices are still relatively high.
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The average Canadian getting a mortgage from federally regulated institutions will expect a stress test from these lenders. Mortgage lenders apply a higher rate of 5.25%, or the approved mortgage rate plus 2%, to test if homebuyers can afford the mortgage. Canadians saw 5% to 7% mortgage rates between 2022 and 2023. Due to policy rate cuts in 2024, the average five-year fixed mortgage rate has decreased to a range of 4% to 6%.
The five-year government bond yield generally provides a benchmark to track five-year fixed mortgage rates. With similar loan periods, the five-year government bond yield gives insights into the returns on a relatively risk-free loan. Financial institutions append a margin to the government bond yield to determine the fixed rates for mortgages, which are riskier than government bonds.
Variable mortgage rates, on the other hand, often move in the direction of prime rates, which are directly impacted by the policy rates. As the policy rate increases or decreases, variable mortgage rates are expected to rise or decline respectively.
In the political space, there have been speculations about the impact of the recent United States presidential elections on the Canadian mortgage industry. The election results, which resulted in positive consumer sentiments, drove spikes in the stock and bond markets. A persistent increase in bond yields may also cause fixed mortgage rates to increase. However, mortgage rates depend on factors such as inflation, market competition, additional government policies and policy rate adjustments. There is a high chance that the pressure on the bond market will start to level off when the new president comes into the White House.
Mortgage rates across the country vary by financial institution. Canadians who are getting new mortgages or looking to renew their mortgages are expected to shop around for the best rates. It’s been forecasted that $315 billion in mortgages will renew in 2025 and $400 billion in mortgages will renew in 2026. We yet have to wait to measure the impact of these renewals on the Canadian real estate market as a whole.
Key Changes For The Canadian Mortgage Industry
The Canadian government has introduced new changes to ease housing pressures and help more Canadians afford homes. Starting August 1, 2024, first-time homebuyers purchasing new builds can get a 30-year insured mortgage amortization.
From December 15, 2024, the eligibility for 30-year mortgage amortizations expands to all first-time homebuyers and all buyers of new builds. This will reduce the monthly mortgage payments and address the issue of affordability. While this helps in the short term, a more extended amortization period generally means more interest costs over the life of the mortgage.
A mortgage amortization period determines how long it takes to pay off a mortgage. Generally, a mortgage’s current term’s interest and the down payment a buyer makes determine the amortization period.
A buyer who makes a down payment lower than 20% of the home’s price will have a maximum amortization period of 30 years if they are first-time buyers purchasing a new build. If otherwise, the maximum amortization will be 25 years.
The mortgage lenders will determine the maximum amortization period for buyers who make a down payment of more than 20%.
Also effective on December 15, 2024, is an increase in the price cap for insured mortgages from $1 million to $1.5 million for homebuyers with a down payment below 20%. This opens up more options for Canadians to afford homes without putting down as much for a house down payment.
Starting next year, on January 15, 2025, homeowners with homes valued up to $2 million can refinance their insured mortgages to up to 90% of the value to access the equity in their homes and fund the construction of a secondary suite, such as basements, in-law suites and laneway homes.
Another exciting change in the mortgage industry is that when insured mortgage holders have to renew their mortgages, they can switch to a new mortgage lender without going through the mortgage stress test process all over again. The mortgage stress test allows financial institutions to verify that homebuyers can afford their monthly mortgage payments should the rates increase by 2%.
Final Thoughts
In summary, there have been policy changes driven mainly by the Canadian government’s attempt to make home purchases more affordable for Canadians and stabilize the economy. As a player in the Canadian mortgage industry, I welcome the proposed policy changes. The outcome is yet to be seen, but I believe these changes along with the accompanying rate reductions will stimulate borrowers who have been waiting on the sidelines to enter the housing market to begin searching for a property to purchase or to refinance existing mortgages. Anecdotally, I currently have several clients who have decided to now reenter the market, but it remains to be seen if that continues as we head into the new year.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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