Rising interest rates mean homeowners may have to sell

Rising interest rates could force homeowners to rethink their financing options or sell their homes altogether.

About one in four Canadians say they will be forced to sell their property if interest rates rise much higher, according to a recent Manulife survey. The survey also found that more than one in five homeowners expect rising interest rates to have a “significant negative impact” on their overall financial situation, while 18% of Canadians fear they will no longer able to afford their current home.

Manulife conducted the survey before the Bank of Canada, or BoC, raised its key interest rate by 0.5 percentage points to 1.5% in June in a bid to control inflation. (The Bank of Canada may announce up to four more hikes through 2022.) So far, the rise in the overnight rate has had a chilling effect on parts of the Canadian housing market. home sales fell 38.8% in the Toronto area and 31.6% in the Vancouver area year over year in May. Canada’s benchmark home price also fell 0.8% to $822,900 in May from the previous month.

With 6.8% inflation affecting the price of things like food and gas, homeowners are feeling the pain. Some say they have to skip meals or defer bills to make their monthly mortgage payments because the cost of living in Canada is also rising.

“Canadians are rightly concerned about the overall effects of inflation on their household finances,” says James Laird, co-CEO of Ratehub.ca, a financial product comparison website, and president of the company. CanWise Mortgage Loan. “Maybe their mortgage payment would be good if their grocery bill hadn’t gone up so much, or if it didn’t cost twice as much to fill up on gas.”

What other options do Canadian owners have besides selling?

According to Todd Fralic, a broker with Alberta-based Quantus Mortgage Solutions, if Canadian homeowners bought their property when interest rates were very low – like at the start of the pandemic – and their mortgage needs to be renewed at a higher, there are options apart from selling.

One option, he says, is for homeowners to adjust their amortization period — the time it would take to pay off a mortgage based on regular payments at a certain interest rate. If you have 10 years in your mortgage at renewal, brokers can show you what the payments would be over 20 years instead of 15, for example.

“Most customers want to accelerate their amortization, not decrease it,” says Fralic. “But given the higher costs of not just their mortgage, but almost everything right now, it’s an option people may want to consider temporarily until the government gets inflation under control. “

Another option is for homeowners with a fixed rate mortgage to refinance and get a rate now before more hikes happen. But it is important to think carefully about this option and assess your financial situation before undertaking the move. “If you have a year left on your term and today’s renewal rate is 1.5% higher, would you be better off locking in a new five-year term today, or trying your Chances are that in a year the rates won’t be 2.5 percent higher?” says Fralic. “It’s a tough decision to make, and most of our clients only think about their mortgage when it must be renewed.

People with adjustable rate mortgages can also consider going for fixed rates if they are worried about rising rates. For homeowners in this situation, you can opt for a fixed rate mortgage for peace of mind, although historically interest rates on variable rate mortgages have been lower. It all depends on your risk tolerance and your ability to weather the next rate hikes. . (Currently, the lowest mortgage rates in Canada are 2.5% for a five-year variable and 3.79% for a five-year fixed.)

One of the biggest costs associated with refinancing a mortgage, whether fixed or variable, is the penalty associated with breaking your contract. These penalties can range from thousands to sometimes tens of thousands of dollars, according to Fralic.

By refinancing your mortgage, you can also access any equity in your home which can then be used to pay off high-interest debt, which can be a welcome option as Canadian households sit on debt. $2.7 trillion, including mortgage debt, in the first few months of 2022. debts in one cheaper payment,” says Fralic.

Advice for people entering the housing market

According to the Manulife survey, nearly 7 in 10 Canadians who don’t own a home are worried about saving up to buy one. Indeed, experts say homebuyers will feel the full impact of interest rate hikes this summer.

Saving to buy a home is often a difficult task, no matter what is happening in our economy, and one that requires careful planning. In addition to using a financial advisor, Laird and Fralic suggest first-time homebuyers take advantage of government incentives, such as tapping into their registered retirement savings plan to get into the market.

It’s a chicken and egg situation right now, according to Fralic. “In many markets, the question becomes: do I buy now and lock in a five-year rate that I know will be higher in a few months? Or do I wait a few months and see if the prices of the real estate continue to go down and accept the fact that my mortgage rate is going to be a little higher?” As with all things personal finance, it is important to make the right decision for your situation.

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