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A For Sale sign sits outside a Toronto home.Fred Lum/The Globe and Mail

For more than a decade, the biggest financial obstacle for many homebuyers in pricey markets was coming up with the cash for a down payment. But with rapidly rising borrowing costs, being able to afford mortgage payments is increasingly becoming an additional hurdle.

The monthly payment for a new mortgage on a typical home in Canada increased by nearly $800 a month between October and April, according to a recent analysis by Ben Rabidoux, founder of research firm North Cove Advisors.

“This is the steepest rise in rates we’ve seen over such a short time since the late 1980s,” said Mr. Rabidoux, who estimated monthly payments based on the national benchmark home price, a 20-per-cent down payment, 30-year amortization and an average of nationally available fixed and variable mortgage rates.

“The number one question that we like to ask our clients when prequalifying them for a mortgage – before we give them an amount – is what is the comfortable payment within their budget,” said Frances Hinojosa, a Toronto-based mortgage broker.

Worry, buyer’s remorse high as real estate market slowdown materializes

These days, it’s even more important that homebuyers have a solid handle on their monthly budget and how a new mortgage payment would affect their cash flow, especially as inflation continues to push up the prices of everyday necessities, said Ms. Hinojosa, who is co-founder and CEO of Tribe Financial Group.

That’s an entirely different conversation from the one Ms. Hinojosa was having with clients in 2021 and the second half of 2020, as rock-bottom interest rates helped propel real estate sales and home prices to dizzying heights in the pandemic. Back then, she recalled, her clients were mostly focused on getting the lowest possible mortgage rate and jumping into the market before property values slipped from their reach.

It’s not a question of mortgage rates approaching the double-digit highs of the late 1980s. Five-year fixed rates are currently in the 4-per-cent range, with five-year variable rates still in the 2-per-cent-range.

Rather, the issue is the speed at which rates are climbing, Mr. Rabidoux said. And mortgage-rate increases of just two or three percentage points mean significantly larger mortgage payments when combined with record-high home prices, he noted.

When looking at affordability measured as the carrying cost of homeownership compared with incomes, conditions in late 2021 were rapidly approaching those seen in 1990. Then, ownership costs for detached homes reached a record 58.5 per cent as a share of median household incomes, according to RBC’s Housing Affordability Measure. By comparison, in October of 2021, ownership costs for single homes were taking up 54.6 per cent of the median household income.

With interest rates soaring, why do so many borrowers still choose variable-rate mortgages?

RBC’s gauge measures the proportion of median before-tax household income required to cover the mortgage payment and other ownership costs based on a 20-per-cent down payment, 25-year amortization and a five-year fixed rate.

With current trends, the market “definitely could” reach the peak affordability crunch of 1990, according to economist Robert Hogue, who authors RBC’s housing affordability report.

“It will depend on how quickly prices respond,” he added. “If we see a material correction in short order, it may sort of partly offset the impact of higher mortgage rates.”

Still, the overall national picture is skewed by Southern Ontario, which has seen the worst affordability squeeze, he noted. Buyers in Vancouver and Victoria, where mortgage sizes are significantly above the national average, are also acutely feeling the impact of rising mortgage rates, according to Mr. Hogue’s latest housing update.

Affordability is also eroding quickly in Halifax, where home prices bucked the national trend and continued to rise in April, Mr. Hogue noted. However, the carrying costs of homeownership in Atlantic Canada continued to be relatively affordable compared with other markets, he added.

The same is true of the Prairies, although prices have been rising rapidly in Calgary and Edmonton over the past several months, he said.

In Toronto, Ms. Hinojosa said the priority for aspiring homeowners, beyond careful budgeting, should be to explore all their mortgage-rate options.

While Canadians traditionally gravitate toward five-year terms, in this market some buyers may find a better fit in a shorter-term fixed rate, which might allow them to ride out the current spate of interest-rate increases without committing to a relatively higher rate for five years, she said.

Ms. Hinojosa is finding that buyers are unusually receptive to the idea of considering something other than a five-year term.

“They are a lot more curious and a lot more open.”

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