Real Estate Market

May 24, 2022 Interest in mortgages from alternative lenders up as rates rise: Brokers

TORONTO -- Canadian homebuyers are increasingly considering credit unions and private lenders to secure mortgages as rates rise, brokers say.

They are seeing more Canadians drawn to these lenders as fixed mortgage rates have crept to about four per cent in recent months in many provinces and territories.

Because the qualifying rate on uninsured mortgages under Canada's stress test is either two percentage points above the contract rate, or 5.25 per cent, whichever is greater, more borrowers are now having to qualify at a higher rate for mortgages from traditional lenders like banks.

However, credit unions and private lenders are often able to offer more competitive rates, even to clients who don't qualify for mortgages offered by traditional lenders.

"If a client's looking for a five-year, fixed rate mortgage, they're now qualifying (with traditional lenders) at say 6 or 6.5 per cent, which really reduces the total amount that they could qualify for," said Sung Lee, a Toronto mortgage broker.

"With credit unions, they offer more flexibility, where you could qualify at just your five-year contract rate or in some cases, if it's a variable, like a contract (rate) plus one (per cent)."

Insurance and financial website Ratesdotca says credit unions and private lenders made up about 3.7 per cent of the country's mortgage business last year and have already handled about 6.7 per cent so far this year.

Credit unions are typically responsible to members instead of shareholders and though they offer similar products to banks, they are not subjectto the same federalregulations, including qualifying rate restrictions, allowing them to take on riskier customers.

The varying interest comes as the Canadian Real Estate Association (CREA) said the national average home price was slightly higher than $746,000 in April, up 7.4 per cent from about $695,000 during the same month last year.

However, on a seasonally adjusted basis the national average home price slid by 3.8 per cent to $741,517 last month from $771,125 in March.

CREA attributed much of the slowdown to fixed mortgage rates, which have been on the rise since 2021, but have been more impactful in recent months.

"Everyone's all worried about the rates ... because we've been accustomed to really low rates for a long time and probably for the last 10 years they've been under four per cent," said Chantal Driscoll, a Burlington, Ont. mortgage broker with RDM Financial Consultants.

"People are getting nervous, but traditionally mortgages should be between four and six per cent. Those are normal mortgage rates."

Anytime mortgage rates edge up and qualifying for a mortgage becomes harder, she notices a "trickle down" effect on credit unions and private lenders, but current conditions aren't pushing interest in these lenders beyond what she usually sees, when the market shifts.

However, she is seeing more interest from people who are not qualifying for mortgages from traditional sources.

"They'll go to ... credit unions or private lenders to qualify a little more than what they'd qualify for with the bank," said Driscoll.

Most of her clients are still managing to qualify under current conditions or through variable rates, even as they also rise, but Driscoll foresees change.

She believes brokers may be fielding even more requests for alternative mortgages in the future because at least one credit union has upped their requirements so all borrowers have to qualify at two per cent higher than the contract or the benchmark rate, whichever is higher.

Meanwhile, Nick Hill has seen a steady stream of interest around credit unions from his clients -- and not just ones who are having trouble qualifying.

"I did two deals for people who work at car dealerships," said the Toronto broker with G&H Mortgage Group.

They qualified for a traditional loan but found better rates through a credit union.

Economists forecast rates will jump by another half percentage point next week — cooling Canada’s housing market even more

The Bank of Canada is widely expected to hike interest rates again next week as part of an ongoing effort to curb consumer prices and cool Canada’s overheated housing market.

With inflation reaching a 31-year high of 6.8 per cent in April, Bay Street analysts broadly expect that governor Tiff Macklem and his team of economists will raise the central bank’s overnight interest rate by another 0.5 of a percentage point on Wednesday, increasing the current rate from one per cent to 1.5 per cent.

Those rates may seem tame relative to historical standards — the central bank’s interest rates typically sat above two per cent until the 2008 financial crisis — but the pace at which rates are being hiked is the fastest in more than two decades, part of an aggressive campaign to slow consumer demand and control inflation.

In April, the Bank of Canada increased its prime interest rate from 0.5 per cent to one per cent — the largest hike since 2000.

Already, the impact of the bank’s tightening campaign can be seen in the housing market, where prices fell about 12 per cent in April, according to the Canadian Real Estate Association.

The higher the rates, the harder it is to borrow money, meaning prospective homebuyers will find it harder to get financing for down payments while current homeowners pay more on their mortgages.

“The expected rate hike will have a further cooling effect on both the number of real estate transactions and prices across the country,” said James Laird, co-founder of ratehub.ca.

The central bank is also expected to continue hiking rates for the rest of the year, but at a slower pace if central bankers see inflation cooling.

“The Bank of Canada is laser-focused on inflation right now but once monetary policy gets toward a more neutral level they’ll have to strike more of a balance between prolonging the economic cycle and getting inflation quickly back to target,” said Nye.

“Anyone with a variable rate mortgage should understand what their payment will be with a 50-basis-point increase next week, and they should budget for additional rate increases totalling one to two per cent for the remainder of the year,” said Laird.

According to ratehub.ca, their mortgage payment calculator shows a homeowner who put a 10 per cent down payment on a $750,000 home with a five-year variable rate of 1.90 per cent, amortized over 25 years, has a monthly mortgage payment of $2,913.

Should the central bank announce a 0.5 per cent increase next week, that homeowner’s variable mortgage rate will increase to 2.40 per cent, and their monthly payment will increase to $3,083.

This means that the homeowner will pay $170 more per month, or $2,040 per year, on their mortgage payments.

Wealthier clients crowding out first-time buyers

In its latest earnings report, Royal Bank of Canada said that a major driver of its strong fiscal Q2 performance was the growing proportion of its higher-earning clients.

However, this seems to be to the detriment of the country’s hopeful home buyers, according to Neil McLaughlin, head of RBC’s personal and commercial banking unit.

“We’re seeing the overall income and net worth of a mortgage buyer increase over time,” McLaughlin said in a conference call with analysts.

With this trend emerging as “a bit of a systemic issue,” McLaughlin said that first-time buyers are “becoming less and less a part of our portfolio.”

Read more: First-time buyers in Canada – will the landscape improve in 2022?

Despite the national home price index ticking down by 0.6% to $866,700 in April, benchmark prices in Toronto and Vancouver significantly exceeded $1.3 million during the month, representing five-year increases of 65% and 40%, respectively.

“It is a bit of a sad commentary in terms of young people being able to get into some of these markets,” McLaughlin said.

RBC reported net income of $4.3 billion for the quarter ending April 30, representing an annual increase of $238 million (6%).

“We remain well-positioned for future growth, and to deliver differentiated long-term value for our clients, employees and shareholders. At a time when geopolitical tensions, inflationary pressures and global supply chain issues are creating an uncertain macroeconomic backdrop, I’m proud of how RBC employees continue to drive positive change in our communities and deliver trusted advice and insights for those we serve,” said Dave McKay, president and chief executive officer of RBC.

Federal government will pay up to $5,000 if you make your home more energy efficient

 

The government of Canada is launching a new program today that offers Canadians grants of up to $5,000 to pay for energy-saving home upgrades.

Prime Minister Justin Trudeau and Natural Resources Minister Seamus O'Regan rolled out the Canada Greener Homes Grants program today — worth about $2.6 billion over seven years — to help homeowners upgrade heaters, install solar panels and replace windows and doors.

 

"As a country, every effort counts to keep our air clean and our environment healthy," Trudeau said Thursday. "We know that these retrofits can sometimes be out of reach, so our government is now making them more affordable for Canadians."

Homeowners will be able to receive grants of up to $5,000 to make energy efficient retrofits to their primary residences, and up to $600 to help with the cost of home energy evaluations.

Trudeau said the grants will help 700,000 homeowners lower their bills and keep their houses warmer in the winter. 

People across the country are able to apply online starting today (the government says the landing page for applications was down earlier today due to high demand). An application starts with an energy evaluation by a certified adviser. That adviser visits an applicant's home and determines which energy-saving measures would qualify for reimbursement.

If the homeowner chooses to proceed, a licensed contractor would then be hired to conduct the retrofits. After an inspection of the completed work, the homeowner would be reimbursed.

It's estimated that private homes and buildings are among the largest sources of carbon emissions in Canada, contributing about 18 per cent of the country's emissions.

Last week, the federal government announced it's providing up to $10 million to recruit, train and mentor 2,000 people to conduct energy audits.

WATCH | Prime minister unveils $2.6 billion home retrofit program