Finally this crazy market is slowing down. Good for buyers not so good for sellers and GREAT for our lenders. Awesome article below from our economist

Canadian Home Sales Slow As Mortgage Rates Rise.

Canadian Housing Market Feels The Pinch of Higher Rates

Statistics released today by the Canadian Real Estate Association (CREA) show that the slowdown that began in March in response to higher interest rates has broadened. In April, national home sales dropped by 12.6% on a month-over-month (m/m) basis. The decline placed the monthly activity at its lowest level since the summer of 2020 (see chart below).

While the national decline was led by the Greater Toronto Area (GTA) simply because of its size, sales were down in 80% of local markets, with most other large markets posting double-digit month-over-month declines in April. The exceptions were Victoria, Montreal and Halifax-Dartmouth, where sales edged up slightly.

The actual (not seasonally adjusted) number of transactions in April 2022 came in 25.7% below the record for that month set last year. As has been the case since last summer, it was still the third-highest April sales figure ever behind 2021 and 2016.

Jill Oudil, Chair of CREA, said, “Following a record-breaking couple of years, housing markets in many parts of Canada have cooled off pretty sharply over the last two months, in line with a jump in interest rates and buyer fatigue. For buyers, this slowdown could mean more time to consider options in the market. For sellers, it could necessitate a return to more traditional marketing strategies.”

“After 12 years of ‘higher interest rates are just around the corner,’ here they are,” said Shaun Cathcart, CREA’s Senior Economist. “But it’s less about what the Bank of Canada has done so far. It’s about a pretty steep pace of continued tightening that markets expect to play out over the balance of the year because that is already being factored into fixed mortgage rates. Of course, those have, for that very reason, been on the rise since the beginning of 2021, so why the big market reaction only now? It’s likely because typical discounted 5-year fixed rates have, in the space of a month, gone from the low 3% range to the low 4% range. The stress test is the higher of 5.25% or the contract rate plus 2%. For fixed borrowers, the stress test has just moved from 5.25% to the low 6% range – close to a 1% increase in a month! It won’t take much more movement by the Bank of Canada for this to start to affect the variable space as well.”

New Listings

The number of newly listed homes edged back by 2.2% on a month-over-month basis in April. The slight monthly decline resulted from a relatively even split between markets where listings rose and those where they fell. Notable declines were seen in the Lower Mainland and Calgary, while listings increased in Victoria and Edmonton.

With sales falling by more than new listings in April, the sales-to-new listings ratio eased back to 66.5% – its lowest level since June 2020. This reading is right on the border between what would constitute a seller’s and a balanced market. The long-term average for the national sales-to-new listings ratio is 55.2%.

More than half of local markets were balanced based on the sales-to-new listings ratio being between one standard deviation above or below the long-term average in April 2022. A little less than half were in seller’s market territory.

There were 2.2 months of inventory on a national basis at the end of April 2022, still historically very low but up from slightly lower readings in the previous eight months. The long-term average for this measure is a little over five months.

Home Prices

The non-seasonally adjusted Aggregate Composite MLS® HPI was still up by 23.8% on a year-over-year basis in April, although this was a marked slowdown from the near-30% record increase logged just two months earlier.

Bottom Line

The fever broke in the Canadian housing market last month. Nevertheless, despite the sizeable two-month slide in sales, activity is still almost 10% above pre-COVID levels and the raw April sales tally was still one of the highest on record.

Markets in Ontario are weakening most, significantly further outside the core of Toronto. Sales in the province slid 21% in April and are now in line with pre-pandemic activity levels. The market balance has gone from drum tight with “not enough supply” to one that resembles the 2017-19 correction period. Elsewhere, Vancouver and Montreal look better with relatively balanced markets, while others like Alberta and parts of Atlantic Canada remain pretty strong.

The Bank of Canada will likely hike interest rates by another 50 bps on June 1.

Written by DLC Chief Economist Dr Sherry Cooper

The Rate Debate.

One of the first questions that potential buyers want answered is: “What is your interest rate?”

It is easy to think that this is the most important question, but there is a lot more to your mortgage contract than just the rate. And so, the rate debate continues!

The rate debate is a hot topic in the mortgage world. Not just the rates itself, but the importance of the rate versus other factors in the mortgage – such as terms and penalties. As a borrower, it can be easy to get caught up in one thing but, if you’re not paying close attention, ignoring other factors could cost you in the long run.

Before we get into these other factors, let’s talk rate. While not the only factor, it does continue to be an important decision criteria with any mortgage product. The interest rate is the percentage of interest you are paying on the principal loan; lower interest rates means more money to the mortgage and who doesn’t want that?

Variable Vs. Fixed

There are two types of mortgage rates: variable-rate and fixed-rate. A fixed-rate is just that – a fixed amount of interest that you would pay for the term of the mortgage. A variable-rate, on the other hand, is based off of the current Prime Rate, and can fluctuate depending on the markets.

Fixed rates are typically tied to the world economy where the variable rate is linked to the Canadian economy. When the economy is stable, variable rates will remain low to stimulate buying.

Fixed-Rate Mortgage: First-time homebuyers and experienced homebuyers typically love the stability of a fixed rate when just entering the mortgage space. The pros of this type of mortgage are that your payments don’t change throughout the life of the term. However, should the Prime Rate drop, you won’t be able to take advantage of potential interest savings.

Variable-Rate Mortgage: As mentioned, variable-rate mortgages are based on the Prime Rate in Canada. This means that the amount of interest you pay on your mortgage could go up or down, depending on the Prime. When considering a variable-rate mortgage, some individuals will set standard payments (based on the same mortgage at a fixed-rate), this means that should Prime drop and interest rates lower, they are paying more to the principal as opposed to paying interest. If the rates go up, they simply pay more interest instead of direct to the principal loan. Other variable-rate mortgage holders will simply allow their payments to drop with Prime Rate decreases, or increase should the rate go up. Depending on your income and financial stability, this could be a great option to take advantage of market fluctuations.

Beyond Rates

When considering your mortgage, other considerations such as penalties can be important factors for deciding on a mortgage product. If you have two competing products, say 1.65% interest fixed-rate and a 1.95% interest variable-rate, it seems as though it is a pretty easy decision. But, what about the ability to make extra payments? And what are the penalties?

It is easy to think that nothing will change throughout your 5-year mortgage term, so you probably haven’t even considered the penalties. However, when looking at the fixed versus variable rate mortgage, penalties can be quite different. Where variable rates typically charge three-months interest, a fixed rate mortgage uses an Interest Rate Differential (IRD) calculation.

Given that nearly 70% of fixed mortgages are broken before the term ends, this is an important variable. Fixed-rate mortgages are typically okay when the penalty is your contract rate versus the Benchmark rate. However, when penalties are based on the Benchmark rate (sometimes called the Bank of Canada rate), it is typically much higher than your contract rate, resulting in greater penalties.

In some cases, penalties for breaking a fixed mortgage can sometimes be two or three times higher than that of a variable-rate. While the interest rate is lower, lower penalties are sometimes best should anything happen down the line.

Conventional vs. High-Ratio Mortgage

Another consideration beyond just the interest rate, is whether or not you will be obtaining a conventional or a high-ratio mortgage. Whenever possible, it is recommended to put 20 percent down payment on a new home. This results in a conventional mortgage. However, as not everyone is able to do this, many buyers will end up with a high-ratio mortgage product.

So, what does this mean?

High-ratio mortgages need to be insured by either Genworth Financial, the Canada Mortgage and Housing Corporation (CMHC), or Canada Guaranty. This is due to the Bank Act, which will only allow financial institutions to lend up to 80 percent of the homes purchase price WITHOUT mortgage default insurance. Insurance on the mortgage is important to protect the lender should you default on your payments, leaving the insurer to deal with the borrower.

The difference between conventional and high-ratio mortgages is that high-ratio mortgages require insurance, which results in an insurance premium. This is added to and paid along with the mortgage, but is an important factor when considering your monthly payments. These premiums are based on the loan to value (LTV), which is the amount of the loan versus the value of your home.

All high-ratio mortgages are regulated to have mortgage insurance, but some homeowners with a conventional mortgage may choose to pay for mortgage insurance to get a better rate.

Smart Questions to Ask

To ensure you understand your mortgage contract, and how it could affect you now and in the future, we have compiled a few smart questions to ask before you sign.

1. What is my interest rate? Can I qualify for a better one?
2. Do you recommend fixed or variable-rate?
3. What are the penalties for breaking my mortgage?
4. Are there any pre-payment penalties?
5. Will I require mortgage insurance? If so, what are the premiums?
6. What will my monthly payment be?
7. Is my mortgage portable?

These are just a few examples of good questions to ask. It is important to do your own research and be diligent with any contract you are signing. Contacting a Dominion Lending Centres mortgage broker today can help ensure you understand what you are agreeing to, and that you are getting the best mortgage product for you!

Written by MY DLC Marketing Team