Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
We’re witnessing a historic correction to home prices, Royal Bank of Canada warned last week.
Not exactly what you want to hear if you just bought a home with the minimum 5-per-cent down payment.
So far, the median priced condo in the Greater Toronto Area, for example, is already down almost 11 per cent since March, according to real estate fintech HouseSigma. It estimates the GTA’s median detached home has plunged almost 25 per cent – in less than five months.
If you bought a $500,000 home with 5-per-cent down, you were 98.8 per cent financed on day one. That’s because, after the $25,000 down payment, the lender usually rolls the 4-per-cent default insurance fees into the mortgage.
Many insured buyers who purchased near the first quarter’s peak now owe significantly more on their mortgage than their home is worth. Some are more than 10 per cent underwater.
I asked a representative at Canada Mortgage and Housing Corp. to estimate how many of its insured borrowers are in this sinking boat. I was told the CMHC doesn’t provide such data for public release.
May I suggest to the taxpayer-funded CMHC that the public has an interest in such vital risk data. More transparency would be helpful.
In any event, estimating from insurer unit volumes, insurer market share and loan-to-value distribution, I’d peg the number of buyers this year who made a minimum down payment and now owe more than their house is worth at less than 30,000 – and obviously, most won’t default.
But if you’re one of those 30,000, not defaulting doesn’t mean you’re not trapped.
What to do if you’re under water
Usually, all you can do is wait it out.
RBC expects the country’s housing sell-off to end sometime in the first half of 2023 thanks partly to immigrant-bolstered demand outpacing supply. But much depends on your region.
Given Canadian real estate overvaluations, the record pace of rate increases, record consumer leverage and the high degree of recession risk, that forecast may seem optimistic.
In the past, regional sell-offs have usually lasted two to three years and taken four to five years to fully recover on average, BMO Economics reported recently. That would seem like an eternity for someone with negative equity.
Fortunately, most mortgages amortize – i.e., shrink – with every payment.
Well, at least all the fixed- and adjustable-rate mortgages do. That’s not always the case when it comes to variable-rate mortgages.
A sample scenario
Given a $500,000 purchase with 5-per-cent down at this year’s average five-year mortgage rate (3.27 per cent according to my records), here’s how a mortgage balance would drop over five years, assuming no prepayments or rate changes:
- After one year: $480,970
- After two years: $467,511
- After three years: $453,608
- After four years: $439,247
- After five years: $424,412
Using a higher rate, like 4.99 per cent, the balance after five years would also be higher: $437,158.
In other words, this borrower would pay down her mortgage to 12.5 to 15 per cent below the original purchase price. Hopefully, at this point, your home is no longer worth less than the remaining mortgage.
But if home prices plunged 20 per cent or more, and this homeowner had to sell – perhaps because of a separation or new job in a different city – they’d have few options. That is, if they didn’t have another way to pay back their lender.
When your back’s against the wall
If you can’t make your payments and your home is still worth more than the mortgage, odds are, a bank or default insurer will be more open to working with you.
The last thing they’ll want is to take back a home with negative equity, so long as there’s hope you may pay eventually. That’s especially true in a mass sell-off event.
Smaller or private lenders may be less flexible, however. That’s one appealing aspect of big banks in a plunging real estate market.
All large banks provide relief for customers facing payment difficulty, including forbearance on mortgage payments, says the Canadian Bankers Association’s Mathieu Labrèche. He adds that support is offered on a case-by-case basis and differs between financial institutions.
Banks don’t get much love sometimes, but credit is due to Toronto-Dominion Bank. It’s an industry leader when borrowers hit tough times. Here are some of the options it offers to those experiencing financial hardship, according to Erin Sufrin, a TD spokeperson.
- Payment deferrals of up to six months (applicable to customers who have not previously deferred their payments)
- The ability to make interest only payments (up to $10K interest payments or two-year interest-only payment duration, whichever comes first)
- Amortization extensions (up to 35 years)
- Debt restructuring (refinance, consolidation loan)
That’s on top of TD’s normal skip-a-payment options. And some of the other banks do the same.
Notably, none of the solutions above damage your credit score, TD says – so long as you contact the lender quickly and proactively. That’s the trick. Never ever wait until you’ve already missed a payment to contact your lender for help.
If you do seek lender assistance, and it’s a default insured mortgage, and they don’t give you the relief you need, call your insurer immediately. They can often offer “workout programs” that’ll give you more time to get your finances in order.
Rates this week
Most rates edged higher last week. The exception was the lowest nationally available insured five-year fixed rate which actually dropped six basis points. (There are 100 basis points in a percentage point.)
We could see more fixed-rate cuts with bond yields plunging. Expectations of major fixed-rate reductions should be tempered, however. Banks are trying to maximum revenue amid shrinking mortgage volumes, funding cost volatility and the near-certainty of a spike in credit losses ahead.