When to get into the housing market, how much to spend, when to renew
Jennifer Stone – Durhamregion.com
Patrick Forbes has seen both sides of the mortgage rate game.
Earlier this year, before rates started to creep up, the Durham resident was looking at whether to refinance to take advantage of historically low rates. But, by the time he got around to doing anything about it, rates had started to rise. Changing his mortgage would no longer save him money.
“What got me was procrastination,” he said. “I missed my moment, if you will.”
But Mr. Forbes has also been the beneficiary of interest rate fluctuation. In the 1970s, when rates hit historic highs, he bought his first home. Rates were stuck around 22%. But, for a few days, almost unbeknownst to him at the time, rates were cut almost in half. It was during those days that Mr. Forbes’s mortgage went through.
With interest rates edging up, tales of houses on the Canadian market being over-valued in double-digit territory, horror stories of foreclosure and seriously delinquent mortgages in the U.S., and changes to mortgage lending rules in Canada, all sorts of questions of affordability could be haunting those looking to buy, and even those already in the market.
There’s no question interest rates will go up, said Finance Minister and Whitby-Oshawa MP Jim Flaherty. But, he also doesn’t think the incredibly high rates — like the 22% Mr. Forbes speaks of seeing in the 1970s — are likely to be seen again.
Mr. Flaherty was a young lawyer during that period of record-high interest rates.
“I remember people coming in (to his office) and handing over their keys” because they simply could no longer afford their homes, given the interest rate of the day, he said.
But, higher interest rates are reality, he said.
“Gradually, interest rates will return to something that’s more like what’s historically normal,” he said.
Ensuring people can continue to afford their homes even when interest rates increase was part of the rationale behind recent changes to mortgage lending rules Mr. Flaherty recently introduced.
“We were seeing more and more insurable mortgages” with a “high ratio” of debt, he said. “We wanted to tighten that up.”
The new rules are lauded by Oshawa-based mortgage agent Elfie Hayes.
“The changes the government have put in place were wise,” Ms. Hayes said.
As it was, Canadian lending rules and practices have tended to be a little more conservative than those of the U.S., and it shows. South of the border, housing prices dropped 33% between 2006 and 2009, said TD Chief Economist Don Drummond, in Oshawa for a recent City-run event. That didn’t happen in Canada.
“Almost 10% of mortgages in the U.S. are seriously delinquent, meaning more than three months behind in payments,” Mr. Drummond said, noting history has shown about 50% of those who land in the “seriously delinquent” category wind up defaulting on their mortgages.
It’s different in Canada, where far fewer mortgages have ended in default, he said. Less than half a per cent of Canadian mortgages “are delinquent at all, never mind seriously delinquent,” he said. That means there’s not been over-supply, and house prices have remained strong.
But the new rules are a little more conservative yet. One of the key changes relates to variable versus fixed-rate mortgages, Ms. Hayes said. While mortgage-takers previously could have pre-qualified based on interest at the usually lower, but subject to fluctuation, variable rate, now, even if they’re taking a variable mortgage, they have to qualify based on the fixed rate.
“It’s decreased people’s buying capacity and that’s not a bad thing,” noted Ms. Hayes.
The vast majority of mortgage holders who have in past opted for variable rate mortgages have traditionally locked in within two years, Ms. Hayes said.
The variable rate mortgage is something Ms. Hayes often steers her clients away from anyway, unless they’re very financially solid, she said.
“If a new couple, recently married, with 5% (down payment), were talking about a variable rate mortgage, I would discourage them,” she said, noting the potential for fluctuation of payment, along with the possibility of increased expenses or decreased earning — after all, young newlyweds are “more likely to have mat leave” — make the variable rate less of a good idea.
A good real estate agent will also employ strategies to help buyers remain within their realm of affordability, said Dierdre Mullen, president of the Durham Region Association of Realtors. Often, it’s unnecessary, though, she noted.
“Buyers are really savvy,” she said. “They understand the costs involved in buying a home.”
Still, realtors will point out potential costs, like landscaping for a newer home, or roof or other high-dollar replacements that may be necessary for an older home, she said.
Real estate professionals “absolutely” counsel clients to ensure they stay within their affordability range, Ms. Mullen said.
“Your job as a realtor is to do what’s in the best interest of your client,” she said.
Most of the experts expect a slow rise in interest rates — though not to anywhere near the historic highs Mr. Forbes was able to avoid three or more decades ago — and a similarly gradual decrease in housing prices and a slight softening of the real estate market. But homes will always be bought and sold, they say. And it’s almost impossible to say when the best time to buy, sell or renew a mortgage will be.
Mr. Forbes thinks he may have missed to boat to renew under the historically low levels; already, rates have inched up over what he’s paying on his existing mortgage.
“I had oodles of time,” he said. “The rates were very low and very stable. They were very low and I did nothing . . . and it cost me.”
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