COVID-19 and home financing: “What happened?” and “What’s next?”
Anyone involved in financing a home in 2020 probably thought it was like “adding insult to injury”. Buyers dealt with bidding wars in cities and rural areas had to add virtual viewing and safety precautions to the mix. Those looking for a new mortgage faced tighter lending criteria and a tougher mortgage stress test. Even those looking to refinance had to weigh whether the low interest rates warranted the cost of breaking a mortgage and the penalty they could incur.
It leaves one asking: “What happened?” and “What’s next?”
Homebuyers faced high prices, in more areas.
In 2020, Ontario’s real estate sales were driven by low rates and buyers looking for a larger home. A lack of supply fueled the buying fire: a Re/Max Canadian Housing Market (2021) study* states that job loss and income disruption had less effect than expected, and only 6% of Canadians were directly influenced by the pandemic to sell. As a result, real estate prices in Ontario’s capital reached a record high last year, up 13.5% from 2019, to an average price of $930,000.
In addition, the study shows that buyers also faced unprecedented sales and prices in suburban and rural areas in regions across the country. Canadians under age 35 were more likely to have realized that they needed more space and were motivated to move out of their current neighbourhood. Working from home, as teachers and many other Canadians did, made the idea of moving further from the workplace to find a larger or more affordable home more feasible. In Ontario, increases from December 31, 2019, to October 31, 2020, included: a 17% increase in London; 14% increase in Hamilton; and 19% increases in Kingston and Collingwood. “It was a ‘drive it ‘til you can afford it’ movement,” says Chris Knoch, Educators Financial Group Mortgage Agent Level 1 – Regional Director, Lending Services. “Some buyers would literally get in their car and drive away from Toronto, check out the areas they drove by, and stop when they found what they could afford.”
The process of searching for a home also changed in 2020. With the days of casually dropping into an Open House long gone, agents honed their skills making virtual tours, and buyers were doing at least their preliminary checking out of a place online.
Although predictions vary, most suggest that housing prices will continue to rise for at least most – if not all – of 2021.
The Re/Max study says continued buyer demand for space, and ongoing low supply, will result in housing prices growing 4-6% in 2021. Canada Mortgage and Housing Corporation suggests the frenzy will begin to cool at the end of the year, as widespread vaccinations take place and if the economy recovers more quickly than expected.
Bidding wars are likely to continue for as long as demand outweighs the housing supply. Some are saying that when COVID-19 restrictions are lifted, increased immigration will also add to the demand.
There are strategies that can help you come out on top in a bidding war, such as including a deposit with your offer, leaving closing dates open, and taking an active role in negotiations.
Mortgage seekers were met with more stringent requirements.
Homebuyers applying for a mortgage during the pandemic faced new challenges in getting preapproved mortgages and mortgages for a rental property, as well as new regulations for default insurance.
“Pre-approved mortgages, although a great tool to determine a buyer’s maximum amount of mortgage, were not the ‘golden ticket’ when making an offer to purchase without conditions… something buyers felt pressured to do in the pandemic’s seller’s market,” says Chris. “Also, self-employed home buyers were challenged when some lenders required ALL documentation up front, including proof of income and a dated job letter proving employment during the last 30 days, paystubs, a T-4 or Notice of Assessment.”
A pre-approved mortgage also depended on a homebuyer’s status remaining unchanged. The employment status of the applicant needed to be the same, and no big purchases could be made between getting pre-approved for a mortgage and closing (i.e., no new car).
Those wanting a mortgage for an income property experienced Increased difficulty due to the uncertain rental market and tenants’ ability to pay rent. Banks limited the use of a home equity line of credit (HELOC) to fund a down payment, making it harder to borrow from one home to fund the down payment on the other.
The CMHC changed its criteria for their mortgage default insurance, which is mandatory when the down payment is less than 20% of the purchase price of a home. (Other default insurers in Canada have not changed their criteria.)
As of July 1, 2020, the following CMHC criteria were changed:
- The borrowers’ gross debt service ratio must be under 35% – instead of 39%.
- The borrowers’ total debt service ratio must be under 42 – instead of 44%.
- The borrower’s credit score must be a minimum of 680 – instead of 620.
- Borrowed down payments are now prohibited
As of early summer 2021, mortgage applicants still face the above issues. In addition, on June 1 the OSFI (Office of the Superintendent of Financial Institutions) introduced modifications for the mortgage stress test. The new calculation of the minimum qualifying rate will now be set at either the mortgage contract rate plus 2% or 5.25% — whichever is greater.
Here’s an example: a home buyer hopes to get qualified for a mortgage with a rate of 1.69 % to buy a $716,828 home. After a 20% down payment, they would need a mortgage of $573,462. With an amortization period of 25 years, their monthly payment would be $2,343.41, according to the federal government’s mortgage calculator.
But given that 1.69 plus 2% is less than 5.25%, the borrower would be stress tested against a 5.25% interest rate. At 5.25%, the borrower’s monthly payments would be $3,417.36. The borrower would need to prove that they had enough income to afford the $3,417.36 payments, even though they would actually be paying $2,343.411.
Looking for a mortgage today requires the help of an expert. The mortgage brokers at Educators Financial Group are up to date on changes to mortgage requirements and will negotiate the best mortgage for you with a variety of lenders. If you have any questions about working with a mortgage broker, call us today at 1.800.263.9541
Refinancing meant understanding penalties.
According to the Re/Max study mentioned above, 40% of Canadians realized that their home needed renovations during the pandemic. The need to fund these, as well as deal with other pandemic-related needs for cash, led many to refinance their mortgage. Stats Canada says that the amount of new mortgage lending (for the purchase of properties and renewals of existing mortgages) reached record levels of over $42 billion. Renewals rose sharply in March after interest rates fell to historic lows.2
Five-year fixed rate terms were the most popular, accounting for almost half (49%) of the total outstanding balance of existing mortgages by late 2020.
Interest rates are key to whether it’s worth the cost of breaking a mortgage, and whether to look for a fixed- or variable-rate mortgage if you do.
Currently, interest rates remain low. In May 2021, The Bank of Canada stated it would keep its key interest rate target at 0.25% until the economy has recovered, which it estimates will be mid-2022. These low rates remain an incentive for homeowners to consider breaking their mortgage, which incurs at least two costs. First, a lawyer must change the financing on title. This cost is sometimes fully or partly covered by the lender. Second is the prepayment penalty, which one’s current lender charges for breaking the mortgage contract. This amount is generally calculated as either three months’ interest or the interest rate differential payment (IRD), whichever is greater. (Note: understanding your mortgage contract is important in verifying exactly how your lender calculates penalties/early payouts, as this may differ from lender to lender.)
However, refinancing is not for everyone, says Chris. “Homeowners shouldn’t refinance if they’re still in a shaky financial position due to COVID-19. Refinancing a mortgage means having to requalify, which is the last thing you want to do if you’ve lost income or can’t make your payments, as you could end up in a worse position.”
There are several options and details to ensure this decision is right for you. A Mortgage Specialist Agent can give you an individual assessment, and help you calculate costs.
When determining “what’s next” in home financing, the only thing for sure is that it will continue to be complicated. Getting the advice of a professional is more critical now than ever. If you have questions about getting a first mortgage or refinancing, talk to an Educators Financial Group Mortgage Agent. They have years of experience helping Education professionals get a mortgage that works for them. Call us today at 1.800-263.9541.