Market Update May: The Current State of Mortgages

Hi everyone, I’m James Garbutt. And I’m Denny Dumas. And this is the Garbutt Dumas Real Estate Podcast.

Denny: I think our listeners are probably slightly disappointed to not see Jamie or Monica next to me, but what’s our combined podcast experience man? It’s got to be, it’s got to be close to 1000. How many podcasts do you think you’ve done?

Alex: Total? About a 1000.

Denny: No, combined, combined.

Alex: Oh combined! 

Denny: Because I’m probably around 500. 

Alex: With everything I’m probably about 250. 300 max. Somewhere around there. 

Denny: Next year when we do this again or in six months from now when we, all our predictions come true, we’re gonna talk about, we will be over 1000.

Alex: I love it. 

Denny: We’ll have a little celebration. And we’ll do it on a Saturday so we can have a beer.

Alex: Yes! Ha ha, Or a Friday night. We can do a Friday night podcast night. Alright.

Denny: I like it. November or something like that. Today on the podcast, a very, very, very special guest. One of my favorite people in our industry, one of the best mortgage brokers in Canada. If you don’t have a friend in financing, maybe reach out to Alex or find a friend. Because it is so valuable for me in this real estate world to have a connection like my friend Alex McFadden sitting here, that I can call anytime and ask questions or advice or thoughts or what’s happening or even just to reshare your posts after the Bank of Canada meetings is so powerful in our industry to save time and I want to first of all, thank you. But..

Alex: I want to say right off the bat, I did not pay you for that. Thank you. No paid ads, right? Or no free ads? I don’t know. It was good. Thank you. I appreciate it very much. 

Denny: You know you have a ton of knowledge in this industry. And I very much appreciate how much you share and I think consumers appreciate how much you share. 

Alex: Thank you. 

Denny: So thank you. Now we’re gonna dive a little deeper into that, over our next few episodes here on the GD podcast.

Alex: Love it. Looking forward to it. 

Denny: First of all, this one will be a little bit of an update on what is going on in the financing world currently. Maybe start with a quick summary of the last 12 months just like what the Bank of Canada has done. Maybe why?

Alex: Well the last 12 months, literally picture a roller coaster, except for it only goes up. Right? And now we’re at the top of the roller coaster and we’re all sitting there with their hands up in the air, waiting, waiting, waiting. But then it just keeps going. And we’re stuck. Now we’re stuck. We’re stuck. 

So that’s basically the picture of what’s happened the last 12 months is, we went up that roller coaster and the machine’s stuck we’re waiting for somebody to come up and fix it. And fixing it is basically a point at which you know the economy is taking a little bit of a dive. Henceforth the next obviously, going down the hill on the roller coaster. Let’s put that into real terms, so people understand that rates went up, they’re high, they’re hanging out at ,you know, five to 6% range for most people. 7% for other people, and it was a shock to the system. 

From a lending perspective, man like, not only did the lending, tap as far as applications for mortgages completely turn off in June of last year. But it put people into unique situations in the last, let’s say three to six months, where they’re now having to either come up for renewal or they’re thinking about making a move and they’re thinking, How do I adapt to this new world of lending? Not only that, but lenders have changed their hunger for financing. I’ll talk about a big bank later that’s completely shifted its mentality and mortgages and they’re also looking at guidelines. Specifically who’s qualified who’s not qualified. 

So what that’s done is for, as a mortgage broker, advisor, it’s made me have to work really quickly. You talked about someone you can call. Well, I am trying to learn this as fast or faster than anybody else. That’s in the market. Like, we’re trying to figure this stuff on the go in many situations, so we can provide that advice. And it’s left a lot of people in the lurches, not knowing what to do. Concerned, scared, frightened. And really, at the end of the day, trying to understand what’s next ,which hopefully we can talk about here today.

Denny: We’re definitely going to share our thoughts, that’s for sure. The last 12 months has been very strange. And anyone who’s been listening to podcasts, they’ve heard our synopsis of what rising rates has done to real estate in Greater Vancouver. We probably saw single family in a lot of cities drop 15 to 20% in the summer and fall of last year. And really due to the lack of supply, because rates are not well fixed rates have started going down but variable has not been started coming down yet. Really due to lack of supply early in 2023 is why we’re seeing so much more activity than we did in the fall.

And it seems like the sentiment anyway with consumers, you know, you briefly mentioned we’re near or at the top of that roller coaster. And it seems like a lot of consumers are starting to feel some confidence coming back in terms of jumping back in and sellers who have been sitting on the sidelines because their neighbor sold in March of 2022 for 10 or 15% higher than the last sale in the neighborhood. A lot of sellers are starting to see prices start climbing again, which is now creating these conversations and even, even our team in the last two or three weeks it seems like the phone has rang a lot more than it did in January, February, March of this year. 

From your side of the industry, maybe give us some thoughts on like, how much more difficult was it to qualify from a consumer perspective in the summer and fall as rates are rising and why? Why was it more difficult? 

Alex: We were chasing the market, as you know, last May, June, July. Basically as long as the rates were going up, we were constantly having to change the market. So it was, it was like the dreaded Bank of Canada change day and I don’t know how to articulate it any differently than to be like it felt like you were, your hair was on fire but you were drowning and you’re like, I don’t know what’s worse. And why is my hair on fire when I’m in the water right now? 

You had to not only adapt to the 10s and in, in some cases hundreds of contacts between texts, email, Instagram, Facebook, calls, everything of people concerned. And it started before, right like it literally started a few days before the rate changes. What’s the new rate going to be? What do you think’s going to happen? How do I adapt to this? What do I do? To obviously after the rates were changed, trying to deliver the information as we discussed, but more importantly, how to communicate with people “Well, unfortunately you just lost what appears to be 5% borrowing power”. And we’ve got 75 to 100 maybe more people that were pre qualified at the lowest possible interest rate, at the time, in order to take advantage of that. So that continued for six months so without right I believe four or five rate changes, where that was a very constant occurrence. 

So how do you communicate that to people how you tell them all of a sudden you qualify for less money? Right? That’s a pretty tough thing to articulate to people. And it was a hard thing for people to hear. There’s no doubt about that. So it was a crazy time.

Denny: Because the stress test is benchmark or Bankrate plus two? 

Alex: Yeah, so stress test is a minimum of the benchmark or the rate that you’re acquiring plus 2%. And so people were taking variable rates predominantly because they were lower, right? So they could qualify for more money or just generally speaking, they wanted to have a variable rates. 

Remember this? At the beginning of 2022, there were I don’t know if you did any podcasts on this, but there were no predictions that rates were going up 4%. Your worst case scenario predictions were 2%, maybe two and a half percent across the board. And then they waited. They didn’t raise rates and of course that kind of held things back a little bit longer. And it was basically like pulling back a slingshot to the point where it obviously, when they finally started doing it, it was too late. So things blew up. 

Denny: To put it in like a very clear term in March of 2022 when rates were around two to two and a half percent. The stress test, what someone would qualify for, was roughly at four>

Alex: 5.25% was the stress test in the beginning. 

Denny: 5.25% ok. Versus today?

Alex: Well, that depends on the rate that you take today, that’s another challenge. 

Denny: Sure. But that’s gonna be probably in the seven and a half range. 

Alex: On it, if someone qualifies for a loan with 20% down, the stress test for most people is about seven and a quarter percent today. If you’re putting less than 20% down depending on the rate and term, it’s about six and three quarters to seven. 

Denny: Okay.

Alex: So that represents about, depending on the situation, 15 to 20% loss and borrowing power. At the height, it was more like rates were higher actually in the winter, when house prices were completely deflated. They were about a quarter to half percent higher than they are today. Probably closer to half percent. And at that time, qualifying and borrowing power was down by about 22 to 25% across the board. 

So on a million dollars you’re qualifying for you know, let’s say $850-$800,000 is not it’s not the loan amount because it’s correlated to your income, but it’s still a significant drop inborrowing power.

Denny: For sure. The thing that we were talking about before that I really want to try to understand a little better is banks really tightened up the discount off the variable mortgage rates. So it was pretty common in 2021, 2020 through COVID. That banks were offering variable rates that were prime minus one, prime minus I don’t know what the lowest you ever saw. I think that’s all prime minus 1.2. 

Alex: Yeah, there were some crazy discounts for a bit. Yeah.

Denny:  And now what is a common discount that a bank is going to offer? Prime minus…?

Alex: For an insured mortgage less than 20%? down? You might get prime minus 90 to prime minus one. You might. Yeah. But for uninsured, which is typically someone who’s putting 20% down or doing a 30 year mortgage, something of that nature, million dollar property, Prime minus 30. Some banks aren’t already been, aren’t even giving a discount right now like, you’ve got lenders like Scotia Bank that I think are Prime plus 05 for Prime plus point one. And that’s first owner occupied that’s not even including like a rental premium or anything of that nature. 

So the Prime minus 30 is probably what you’re going to find on 30 year mortgage for most lenders right now.

Denny: So why is that discount adjusted so much?

Alex: Okay, so, we talked about this briefly, but there are a lot of reasons and discount changes and some of them the higher powers I have no freaking clue but there’s a few things to think, think about. So let’s go back a quick second for anybody that’s been following mortgage rates or for someone who’s looking at this the first time and they want to understand variable rates, they need to understand where the market is at any given time, right?

So when we look at the, you’ll notice that the discounts are somewhat always correlated to fixed interest rates. Okay? When fixed interest rates are higher, when fixed interest rates are higher, typically, you’ll also find that the variable rate discounts are lower. There’s a lot of reasons behind this to start with, but one of the reasons of course as you can imagine, as banks want to keep their books balanced. They do want a pretty even number or higher number of in fact, they do want a higher number of fixed rate loans when compared to variable rate loans because this, this signifies certainty. 

When it’s a fixed rate mortgage, you’re buying as a lender or investor, if you will, you’re buying a certain amount of interest for a period of time. Whereas a variable rate you don’t have that cost certainty built in. 

One of the other considerations that I mentioned previously in passing, is balancing the books. In 2021 and 2022, more people than ever before, started taking on variable rate mortgages because the discounts were Prime minus one. You know when 2020 hit, they took the discounts away again, cost certainty. They wanted to keep things balanced. They wanted to make sure they were earning up to the revenue of course, and then they slowly started giving the discounts back, and back and back and then and then it became a price war.  Okay, there was a point at which everybody was kind of dropping their pants so to speak. Let’s get that mortgage money and let’s keep funneling in as much as we can. And obviously, nobody saw rates going up by 4% Because the drawback there has been of course, had negative repercussions on borrowers being able to repay the loans right. Not to the amount that we thought but still. 

So a big part of it really comes down to that one piece I mentioned is balancing their quote unquote “books”. How many mortgages they want on the books that are variable versus fixed. They don’t want them to be all variable. One reason that you discussed previously A) it’s very easy to exit those terms. So there’s there’s no cost. What’s the word? It’s harder to rely on that loan staying on your books, because that person can exit the loan at a much lower cost than a fixed rate mortgage. So there is some value that a bank will place on that, which is projections. Right. I already mentioned a little bit about the cost certainty but the market and what’s going on taking away the discounts. 

Fast forward a little bit because I don’t we don’t wanna talk about this the entire time. One big thing to look out for is where are fixed rates at when there’s a certain discount in place. When you start to see fixed rates come down, you will also start to see variable rate discounts open up a little bit. Again, to provide a little bit more cost certainty. Some of it depends on what’s happening in the markets at any given time, which you can obviously watch the bond yields if you want to, to get an idea as where as to where fixed rates are going, but I don’t believe we will see discounts from really come back until we start to see that inflation cool off and we see those recessionary measures, because that’s the point at which you can see all interest rates feel a little bit less tight, if you will.

Denny: We are May 9, 2023 today, the next Bank of Canada meeting I believe is June 7.

Alex: It’s coming up in a month, yeah.

Denny: There’s four left, I think?

Alex:  I had this conversation with someone yesterday. I said at this point, I just had to tattoo it on my hand every year so I know which ones are coming up. People asked me this all the time, like it’s in my phone, I’ll go look it up. I don’t know. I don’t care anymore.

Denny: Next one is June 7. What are mortgage brokers like you expecting for the next six months? 

Alex: I’m gonna like, go off a tangent from Groundhog Day. I’m gonna hide. I’m not coming up. I think the Bank of Canada is going to do the same thing, they’re not gonna come up for a little while here. I think they’re hide their head under the ground and the banks are in a wait and see mode. We saw the US Fed which is the US equivalent raise rates just a few weeks ago. Last week. I saw rates go up last week. They didn’t say they were done. But they did indicate that they’re closer to the top and they are the bottom. Meaning the end sorry than the beginning. Meaning that they do also see a little bit of light at the end of the tunnel. 

The Bank of Canada is still pushing for a 3% target rate I hope people understand. So basically this target that they’re trying to get to by increasing rates. And at least what is going to be probably the primary predictor of where they’re going is going to be the job rates, the employment rates, and they’re tracking quite a few different metrics. We don’t even know the metrics that they’re tracking, they don’t really tell us but we can make assumptions and where things are at. And the job rates are still quite high in Canada. And so I think it’s going to come down to what we see in the next few weeks and months here, which will really indicate whether or not they feel impelled to raise rates. 

The one wildcard here in all of this is the housing market is still moving and it has picked up. And that could actually work against us if we want to keep rates low. That will work against us because there is a point at which they can move that one lever, which in their minds would again, slow things down a little bit. 

The reason I don’t think that’ll happen is because we publicly stated the pause. And I think they also have been hearing from people that there’s a lot of homeowners that are hurting and the people that are hurting are of course most of the middle class folks who don’t need to be hurting anymore. So we’ll see but I don’t think they’re gonna raise rates again.

Denny:  For the remainder of 2023?

Alex: Ah no, for June. Yeah, we’ll go with that one. And I’m going to probably eat my pants if they do raise rates in this episode podcast that goes out. But indications right now are that again. What’s happened here is rates started going up in March of 2022. And they’ve continued to go up. And typically, I mean, most economists will tell you this as well. We don’t really see the repercussions of rates increasing for at least six to 12 months. And because it was fueled by so much fire and we didn’t really see it go up enough until June of last year. We’re only just about to hit the 12 month mark. And it’s interesting because it’s just now that we’re seeing and we’re talking about some other time or later, the renewals and what’s going on there.

And like I did have a call. I haven’t had a lot of these calls. I’ll be honest with you, but I did have a call with someone the other day. And it’s like, you know what, man, I’m struggling. I’m working overtime. I’m doing all these hours and I’m like, I don’t know if I can keep a house. Right? So we’re starting to get a couple of those phone calls. So I think, again, that’s, that’s the 12 month mark here, right? I mean, six months since the last major increase, if you will, five, six months. But you know, I think that those types of things are going to leak back into the Canadian economy. And you know, in the summer, it’s typically where people spend a lot of money so we’re gonna see really what that looks like, right?

Denny: Let’s talk about that then. Like, there are a number of people whose renewals are coming up towards the end of this year or early next year, who a lot of them have two, two and a half percent fixed year, fixed rate. What are those conversations looking like right now? What are options for people coming out of a two and a half percent mortgage looking to likely go into 5, 5.25? 

Alex: So,  the first thing is that not enough these people are having conversations with someone. 

Denny: Totally.

Alex: A lot of people are waiting for, getting a letter and they’re just doing, shake my head, oh my goodness. What do I do? Of course, for a lot of folks, you know, they don’t know that there’s other options out there and a lot of other people have heard the news and they think I don’t qualify, they just think that and so if you get that in your mind, then of course you’re probably more inclined to not do anything or not move forward right. So the first mistake everyone’s making right now, I shouldn’t say everyone but a lot of people are making is they’re just accepting that they have to just accept what they’re getting given.

The second thing is, even if they do have a competitive quote unquote “rate offering” from the exact bank that they have, there is often no strategy in play with those people. We talked about this before the podcast, maybe in the podcast, but if you were someone that did take the bet on the variable, the bad that you will, I’m not suggesting you should but if you did take the bet on the variable rate today, and the discount and we did see the Bank of Canada decided to lower interest rates and the discount wasn’t good today. Well, you can refinance that at a relatively low cost in a year or a year and a half and take advantage of that. 

I’m not going to suggest that is the right play for everyone. And in fact, for most people right now, it is a little bit more of a judo, I don’t know what you call it, Jedi, Jedi move. Thank you, it’s  all the same Star Wars, martial arts, it’s all exactly the same. What I guess so basically, the first thing is people are not paying attention to the renewal dates, and I’m not talking to someone else. There’s two things in one. And the third thing is when they are paying attention they’re just reaching out and saying, Hey, what’s the best rate and they don’t want to go through the pre qualification process. And so they’re not listening to people on income strategy, or they’re not talking to the right people, I don’t know.

The last thing is there actually are people who are simply not qualified, or they’ve taken on a substantial amount of debt and then those people don’t know where to go and so they’re thinking I have to sell my house, or keep paying this debt and struggle. Right? A lot of this leads to, talk to you and when you’re talking about how you think about it. So a reason that we’re having this conversation and I, I share so much content on my social media is to educate people that there is a better way that you can, it sucks to do this right now. But yes, you can consolidate in some cases, your car loans and your debts and credit cards. So let’s do this one time and let’s set you up for success so you don’t do this again. Let’s remember the feeling of doing this and then let’s make sure that we help ourselves better to do that and suffer and not be in a position where you can keep your home. 

Right, so short version: what people need to be doing is talking to someone early as quick as they can. They also need to be formulating a strategy. You need to think about what happens if rates go down, what happens if they don’t go down? If you’re someone who’s in a position where you’re pretty comfortable. Then you can you can restructure to a one year term with another lender for example, and wait and see what happens in a year. Comfortable meaning you qualify relatively easily, no issues and if rates were to stay the same, and a year from now you’re okay with that quote unquote “gamble” but also knowing that in a year from now, if rates were to go down by 1%, you can do that again. Take a two year term at that time, and the cost savings would be pretty dramatic. 

Someone in the middle of the line might consider a two or three year but they might pick a lender as well. So they might want cost certainty with a fixed rate. But they might also pick a lender where the cost to exit the loan is relatively low, so that if they have the ability to exit that loan early, we can then transition. Most people don’t know the cost to get out of their loan when they get into it. They just look at what is the cost of it. Huge mistake. 

So it’s not always about the variable, especially in this kind of market. But there’s these other little mini moves that you can make and I mean, why would you not want to take that opportunity, even if it cost you point 2% more today or point 3% more today? Your cost savings if rates were to go on 1% in a year and a half or so much greater. So that’s I’m seeing a lot of that right now in the purchase market is the banks are getting this too. So the big bank penalties are obviously pretty big. Big, big, big, very big, large penalties five to 6% of the balance of the loan at certain times in the term. It is a complex topic and they know this. So what they lead with is go get a rate, like if you’re buying a home and bring it back to us and we’ll give you a little better rate. 

But little do they know that consumer is a position, that buyer, I’m seeing this because we were losing business as a broker, because the banks are being so aggressive right now. We’ll give you cash. We’ll do everything and you can explain to someone simply that hey, remember that you know a year and a half from now, you may not be able to restructure this and it’ll feel really icky if you if you can’t get that extra cost savings, and they won’t be helping you at that time. Right, so how is that going to feel? 

Denny: So this is banks trying to get people to sign fixed mortgages?

Alex: For sure. Yeah, and or they’re just generally speaking, they’re doing this to try to keep them in or bring them back if you will.

Denny: The other thing maybe just talk about is extending the amortization of your loan too, right? If you’re coming up to a five year term, if it’s your first time, you likely have built some equity in that home. A lot of consumers don’t understand that you have the option to extend the amortization with a refi.

Alex: Yep. 

Denny: So that your payment maybe is staying the same or going up slightly instead of going up $800-$900 bucks a month that might be going up $200 bucks a month.

Alex: Yeah. Listen, it’s it’s, it’s a scary thing for a lot of people to think about. If they think about it, and they don’t put context to it. Taking my loan today that I just paid off for five years and then bringing all the way back to 30 years. Why am I doing that? What on earth would that, how does that help? Well, the thing is, this doesn’t have to be a permanent consideration. You are doing what’s best for you and your situation today, knowing full well that perhaps again, if interest rates go down in two or three or four years, you’re no longer running uphill. Now you’re maybe on the flat and you can start jogging and increase your monthly payments. So I use this theory when it comes to higher rates or this, this analogy, this analogy when it comes to higher rates. 

Think about it like an ultra marathon runner. Someone explained this to me a long time ago and I don’t, I’m not an ultra marathon runner. I can run 10k tops. Right? If I struggle I can run around Bunsen Lake, what is that? 11k, 12k something like that? I enjoy it and then I’m dead the next day. Hope there’s a break in the podcast here. 

Back to it. Ultra Marathon reference. When rates are high, it’s like running up a hill, most ultra marathoners, Jamie might tell you this, you don’t run up the hills. You walk up the hills because you’re running 100k right. So why are you gonna kill yourself trying to run up a hill? If the, if the hills are flat on flat, your start jogging speed and when the hills go down, you’re gonna start running. I use the same analogy when it comes to interest rates in this situation. When rates are going up or they’re really high, you need to walk. You need to put yourself in a safe position, right. Don’t wear yourself out right now. Some might say pay off as much as you can. And yeah, theoretically, some people can do that. But most folks don’t have the ability just all of a sudden pay off their loan otherwise they wouldn’t take out a mortgage. 

So why jog up the hill, sorry, walk up the hill. And you’re going to do this by extending your amortization to reduce your payments and not trying to consistently pay more unless you’re in a position to do so. When rates are coming down, that’s when you’re gonna start to pick up steam which is either refinancing or restructuring or adding those principal payments back to your loan. And when rates are down, you can really take it if your goal is to pay off the loan as quick as possible. You keep your payments the same as they were before. Therefore take advantage of the additional principal and you’re paying it off like crazy, hand over fist right. 

So what happened was when 2021 and 2020 was around, people were reducing their mortgage payments dramatically, which is nothing wrong with that at all by the way. There’s nothing wrong with that because it depends where you are in your life cycle. But if you had kept your payments the same as they were in 2019, when your rate was 4%, and now it’s 2% you would have paid off a significant amount of that mortgage in a short period of time. So back to your 30 year point. People need to try to get the negative thoughts out of their head that it’s a 30 year is a bad thing. It’s just a tool. It’s a tool allow you to reduce your payments to have a better lifestyle. Simple as that.

Denny: I like that alot. There’s gonna be a couple more podcasts with Alex, so check those out. If you are in the process of refinancing or if you’re mortgage is coming up for renewal, reach out to Alex, Flow Mortgage Co and your Instagram is…

Alex: You can follow me at @MortgagePug or @FlowMortgageCo both work. 

Denny: Beautiful, on to 2023.

Alex: All right!