Navigating mortgage financing in a rising rate environment

Michael Morris Senior Mortgage Specialist RBC Royal Bank of Canada

Attention homeowners, buyers, and real estate enthusiasts: the real estate market in Southern Georgian Bay has experienced a bit of a shake-up. The oncehot market, fueled by low interest rates, has cooled off in the last 12 months with home prices dropping due to interest rate increases. It’s a stark contrast to the frenzy we saw during the pandemic, leaving many buyers and homeowners with new uncertainties. But fear not, with change comes opportunity. I’ll explore current mortgage trends and offer advice on how you can use that to your advantage while navigating the Southern Georgian Bay housing market.

Since March 2nd 2022, we’ve seen the Bank of Canada increase the overnight target several times, which directly impacts borrowers on variable rate mortgage and adjustable rate mortgages. Let’s break down the two types:

Adjustable-Rate Mortgage: your payment adjusts as the mortgage rate goes up or down. Over the last 12 months, borrowers in this type of mortgage option would have felt instant impact of rate changes as their payments would have increased immediately with every Bank of Canada rate hike keeping the amortization in line.

Variable Rate Mortgage: your payment amount stays fixed and if your interest rate goes down, then more of the payment will be allocated towards principle. If the rates increase, more will be allocated towards interest. The term “Trigger Rate” was often used by mortgage professionals during the late summer and early fall of 2022. What’s that you might ask? Well, it’s when you’re in a variable rate mortgage with a fixed payment option and the interest rates have increased to a point where your fixed payment no longer covers the minimum interest portion, and the lender is required to increase the fixed payment to at least cover the interest portion. Although the payments stay lower in comparison to an adjustable-rate mortgage; the drawback is that the amortization will increase since there’s no principle being paid down and upon maturity, the mortgage will need to be brought back to within standard amortization guidelines.

These higher rates and payments translate into the primary question and concern that I now receive daily from clients; what mortgage term should I go in; how do I increase cashflow; what’s my affordability? Regardless of whether you’re buying a home, or refinance/renewing, we’re seeing that most clients are renewing or buying in a shortterm fixed rate typically anywhere from one to three years with hopes and expectations of rates eventually coming down.

Clients with lower rate mortgages that are maturing may find their budget can’t sustain the increased payment amounts—but there are ways to improve cashflow. This could involve extending the amortization to a maximum of 30 years (for eligible mortgage products), changing from an accelerated payment to a standard payment frequency, or consolidating higher interest debt. With the significant growth in Southern Georgian Bay housing prices, there is likely equity built up in the home that would give a borrower flexibility to take advantage of these options.

For homebuyers, increased mortgage rates also increase the qualifying rate or “stress test” which could potentially decrease their purchasing power. On the other hand, the increase has led to a decrease in the price of homes, which for a buyer, could mean lower closing costs (specifically on land transfer taxes), and a lesser down payment than they would have needed a year ago. What we’ve also seen more of from a homebuyer’s perspective, is the ability to put a financing condition (amongst other conditions) on an offer, which was certainly not the case during peak pandemic times.

When searching for a home to purchase, whether investment property, primary residence, cottage/vacation home, it’s imperative to go through the mortgage pre-approval process in advance before you start your search. A pre-approval will involve your mortgage professional going through credit information, collection of income documents, verifying source of down payment and going through a complete review of your finances to ultimately determine your pre-approval amount. In Southern Georgian Bay there is a variety of options. Aside from a freehold, your purchase could also be a home with significant acreage, leased land, threeseason cottages. With different property types, lenders might have different policies that they follow, and by advising your mortgage professional during the preapproval process they can provide advice around this.

Ultimately, the low mortgage rates during the pandemic had a significant impact on the Southern Georgian Bay’s housing market, driving up demand and prices. Many clients—both locally and from urban areas—were able to take advantage of the low rates by purchasing primary homes, second homes, and investment properties as people flocked to area for a more balanced lifestyle. However, with the increased rates and mortgages beginning to mature, clients will need to adjust their expectations, and consider how the higher rates will impact their ability to purchase and impact their personal finances moving forward. It’s important for individuals to stay informed, determine a strategy, and work with both a local real estate representative and a mortgage professional to help navigate the evolving real estate market.