Mahnoor Sherazee
The current economic climate looms like a dark cloud over homebuyers. In Milton, residents complain of monthly home mortgage payments rising, while those looking to call the city their home have seen a decline in purchasing power.
How did this happen?
December 7, the policy interest rate, also known as the target overnight rate, increased half a percentage point (or 50 basis points) from 3.75 percent to 4.25 percent. The hike resulted in an overall 55 percent increase in mortgage payments.
Let’s use Milton as an example by comparing with December’s affordability numbers with data before the Bank of Canada rate increase. Factoring in the average household income in Milton as $116,180, according to rentals.ca .
In March 2022, an average Miltonian household could qualify for a $530,000 mortgage. That number decreased by approximately $30 thousand in December to $469,000 According to Chase Belair, the principal broker and co-founder of Nesto, a Canadian mortgage brokerage firm.
Affordability
| Time Period | Mortgage Amount |
| March 2022 | $530,000 |
| December 2022 | $469,000 |
Understanding Mortgage Options
There are two main types of mortgages. Variable Rate Mortgage (VRM) and Adjustable Rate Mortgage (ARM).
“There seems to be a great deal of confusion over the two types of mortgages, even within the media,” explains Nesto’s Chase Belair. “The two are very different though, and those with VRMs are finding themselves in a very tight spot right now,” he adds.
To simplify, VRM can also be referred to as ‘fixed payment, variable term,’ meaning while a mortgage is locked in at a fixed monthly payment amount; as the interest rate fluctuates, the mortgage holder can hit a ‘trigger point.’ A trigger point is a cut-off beyond which the mortgage holder’s payment no longer covers any of the principal amount, only interest. When a trigger point is reached, the bank usually requires a lump sum payment of up to 20 percent of the original balance.
The lump sum can cover some of the principal amount, and/or the term for the mortgage is extended. This may cost the mortgage holder significantly more than they originally signed on for.
50 percent of variable rate mortgage holders have already hit their trigger rate, according to a research paper published by the Bank of Canada in November. As the rate is expected to rise, that share is estimated to grow to 65 percent by mid of 2023. According to experts’ calculations, this could increase the payment term for some mortgage holders by 40 years.
In comparison, Adjustable Rate Mortgage (ARM)will swell up the current payment to adjust for an interest rate hike, but the term for the mortgage remains unchanged. For instance, as interest rates rose this year, some mortgage holders with an ARM saw their payments increase by as much as $1,300 a month. Similarly, when the rate falls, their payment amount will reduce. The rise this year, however, leaving many in a financial fix.
Belair says those with ARMs are “stress tested” at a rate higher than the interest rate at the time to critically assess their financial feasibility, i.e., their ability to pay off the mortgage they are undertaking.
What are the chances of owning a home before retirement?
Belair says, “The provided scenario is based on the CMHC (Canadian Mortgage and Housing Corporation) debt service requirements which offer the best rates and terms for borrowers. The maximum allowed amortization is 25 years. Assuming the homeowners do not re-extend their amortization during a refinance, they will be on track to become mortgage free before retirement.”
“This is not true for borrowers that opted for VRMs, with fixed payments. When prime goes up, their amortizations extend. No other common mortgage types (ARM or Fixed rate) are subject to this risk, however,” Belair explained.
Canada is expected to welcome around 1.5 million immigrants over the next three years. A significant percentage choose Ontario as their new home, with locations such as Mississauga and Milton ranking high on their list. Competition for a limited number of available properties is expected to get more challenging. When asked if buying a home was more challenging now compared to 15 years ago, Belair says, “Yes.”
“Borrowers today also face more conservative lending guidelines: Two primary differences being the maximum amortization of an insured mortgage being 25 years (previously 30), and the introduction of a stress test in 2016, reducing a borrower’s maximum mortgage amount. The pros and cons of the stress test are a hot topic in the industry, but I believe it was introduced for a good reason and is serving its purpose,” he explained.
Buying a million-dollar home in Milton…
Household Income required to purchase a home for $999,999 in March 2022: $207,000
Household Income required to purchase a home for $999,999 in December 2022: $235,000
*Assumptions: Minimum down payment required of $75,000, Annual Property Taxes of $10,000
August 2022, the average price of a home in Milton is $ 1 million, according to the Toronto Regional Real Estate Board
Source: Chase Belair, Co-Founder Nesto
When buying a home:
- Buy a property beneath your means
For example: If the mortgage allowance is $300,000 do not max it out rather buy within $250,000
- The lowest rate (fixed or variable) isn’t always the most affordable
There are other factors that must be considered before finalizing a rate
- Understand the value of what you are buying
Don’t rush, take time, and do due diligence ensuring the value of every square foot
- Know and take advantage of incentives
- i)RRSP Home Buyers’ Plan
- ii)Land Transfer Tax Refunds for First-time Home Buyers
iii) First-time Home Buyers’ Tax credit
- iv)First-time Home Buyer Incentive
Source: Chase Belair, Co-Founder Nesto
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