What to do about housing affordability amid high interest rates

Right now, home prices are lower, and there are more homes to choose from, meaning homebuyers can take a bit more time with their purchase.Evan Buhler/The Canadian Press

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The sharp increase in mortgage interest rates layered on top of still-high housing prices has reduced affordability for prospective buyers and led many homeowners to experience economic hardship.

Now, homebuyers and homeowners are keen to know what options are open to them. Homebuyers, specifically, are wondering whether they should remain out of the market for the foreseeable future.

The unknown question is – when will the Bank of Canada change direction? Inflation might ease in the coming months, but it might not. So, we’re left dealing with the here and now.

To that end, here are some strategies for clients that could make the most sense.

Extending amortizations, deferring payments

Canada’s lenders and mortgage insurers – Canada Mortgage and House Corp. (CMHC), Sagen, Canada Guaranty Mortgage Insurance Co. – understand that thousands of households simply can no longer sustain rising mortgage payments.

As such, we’re seeing some flexibility in the form of extended amortizations and payment forgiveness, in addition to other ways to help Canadians deal with inflated mortgages.

For instance, Sagen has decided to give lenders more latitude to bail out cash-strapped borrowers. They’re letting lenders extend amortizations up to 40 years to help manage payments. CMHC and Canada Guaranty are also providing short-term payment relief to help struggling borrowers.

It’s early days still, and they expect more requests for this type of assistance. To get ahead, they’re working hard to streamline their processes.

Insured mortgages will not apply to everyone, though. Those with a “conventional” or “uninsured” mortgage – ones with greater than 20 per cent down payment on a purchase or those with existing equity in their homes – may rely solely on the co-operation of their lender for payment relief, at least in the short term.

For example, at HSBC Bank Canada, clients can request an extended amortization to 40 years or interest-only payments. Both options help with lowering month-to-month expenses.

The Bank of Canada has stated that the big banks are “working proactively with their customers who have variable-rate mortgages with fixed payments to determine appropriate solutions on a case-by-case basis.”

Therefore, options like payment deferral, amortization extensions, and special payment arrangements are all being assessed and will likely continue to evolve in the coming months.

Borrow short-term, refinance later

More homebuyers are getting into one- and two-year fixed rates or a variable-rate product – with fewer choosing five-year fixed terms.

The rationale is that if predictions come true and interest rates drop significantly in a year or so – this will create a big difference between the 5-per-cent-plus fixed rates now and whatever the market rates are at that time.

Canadians don’t want to pay a large penalty down the road, so the variable-rate product will afford them the opportunity to break the mortgage with nothing more than a three-month interest penalty.

Fixed-rate penalties at the Big Six banks are prohibitive and will not be broken until renewal. The mortgage play, for now, is generally to borrow short term and refinance lower in a year or two.

Is the current housing environment all that bad?

While we have a few more tough months of unfavourable times to get through, there are some positives.

Right now, home prices are lower, and there are more homes to choose from, meaning homebuyers can take a bit more time with their purchase. Over the past decade, buying a home has required fast decision-making and tight deadlines – especially in hot markets like Toronto and Vancouver.

Prior to today, it was almost impossible to buy a home with a conditional offer in a seller’s market. Yet, in today’s buyer’s market, clients are more likely to make their purchase conditional on a home inspection, adequate financing, and/or the sale of their existing home.

Canadians who may not be experiencing hardship and are currently looking for a property will take these as positives despite having to take higher rates on the chin in the next year or two.

Travis Forman is portfolio manager with Strategic Private Wealth Counsel at Harbourfront Wealth Management Inc. in Vancouver.

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