Real Estate Blog

As mortgage interest rates fluctuate throughout 2024, many homeowners are contemplating whether breaking their mortgage early is worth the penalty. The idea of locking in a lower rate and reducing monthly payments can be tempting, but the cost of breaking a fixed-rate mortgage can be substantial. Here's a breakdown of when it makes financial sense to break your mortgage early, and when it might be better to stick with your current terms.

Why Break Your Mortgage Early?

There are a few key reasons why homeowners consider breaking their mortgage before the term ends:

1. Securing a Lower Interest Rate

One of the main motivations for breaking a mortgage is the potential to secure a lower interest rate, which could significantly reduce monthly payments. If rates have dropped since you locked into a fixed-rate mortgage, you might be able to refinance at a lower rate, saving thousands of dollars over the term of the loan.

2. Accessing Home Equity

As home values rise across Canada, some homeowners may want to access their home equity to pay off debts, renovate, or invest. Refinancing by breaking your mortgage can allow you to borrow against your home's increased value, often at a lower rate than other types of loans.

3. Life Changes

Major life events like moving, divorce, or financial changes may necessitate breaking your mortgage early. If you're moving to a new home and can't transfer your mortgage, or if your financial situation has changed, you may need to rework your mortgage to suit your new circumstances.

Understanding the Penalties

Breaking a mortgage typically comes with penalties, which can be calculated in one of two ways, depending on your lender:

1. Interest Rate Differential (IRD)

The IRD penalty is most common for fixed-rate mortgages. It is based on the difference between your current interest rate and the lender's current rates for a similar mortgage term, multiplied by the remaining balance and the length of the term. This penalty can be particularly high if rates have dropped significantly since you locked in.

2. Three Months' Interest

For some fixed and variable-rate mortgages, the penalty is calculated as three months' interest on your remaining balance. This method generally results in a lower penalty compared to the IRD, making it more attractive to break variable-rate mortgages.

Is It Worth the Cost?

To determine whether breaking your mortgage early makes sense, you'll need to calculate the potential savings versus the cost of the penalty. Here's how to approach it:

1. Calculate the Penalty

Start by asking your lender for an estimate of your mortgage- breaking penalty. Be sure to ask whether the penalty will be calculated using the IRD or the three months' interest method, as this can significantly affect the total cost.

2. Estimate Your Savings

Once you know the penalty, calculate how much you would save by refinancing at a lower interest rate. Use a mortgage calculator to compare your current rate to the new rate and see how much your monthly payments would decrease. Multiply the monthly savings by the number of months remaining in your term to estimate your total savings.

3. Compare the Costs and Benefits

Subtract the penalty cost from your estimated savings. If the savings are greater than the penalty, breaking your mortgage could be a smart financial move. However, if the penalty outweighs the savings, it's likely better to wait until the end of your term to refinance.

Scenarios Where It Makes Sense

1. Interest Rates Have Dropped Significantly

If you locked into a fixed-rate mortgage when rates were high and rates have since dropped considerably, the long-term savings from securing a lower rate may outweigh the penalty. For example, a homeowner with a 5-year fixed rate at 5.5% might benefit from breaking their mortgage early if they can secure a new rate of 4.2%.

2. You Have Significant Home Equity

If your home's value has increased substantially, refinancing to access that equity might make sense, especially if you can lock in a lower rate on a larger mortgage. This can be particularly beneficial if you plan to use the equity to consolidate high-interest debt or make value-adding renovations.

Scenarios Where It's Not Worth It

1. Minor Rate Changes

If the drop in interest rates is only marginal (for example, 0.5% or less), the savings might not justify the cost of the penalty. In such cases, it's often better to wait until your mortgage term ends to refinance without penalties.

2. High IRD Penalties

If your mortgage lender calculates the penalty using the IRD method, the cost of breaking your mortgage can be prohibitively high. In such cases, even a significant drop in interest rates might not make it worth paying the penalty.

Conclusion

Breaking your mortgage early can be a strategic move in 2024, especially if interest rates continue to drop or if you need to access home equity. However, the decision ultimately depends on the penalty you'll face and the potential savings. Carefully calculate the costs and benefits, and consult with a mortgage broker to explore your options. In many cases, it's worth waiting until your term ends to avoid penalties, but if the savings are substantial, breaking your mortgage could be a smart financial decision.

In an effort to make homeownership more accessible, the federal government of Canada recently introduced significant changes to mortgage regulations that will take effect in December 2024. These new rules are designed to give buyers, particularly first-time homebuyers, a better chance at entering the housing market despite current high interest rates and soaring home prices. Here’s what you need to know about the 2024 mortgage rule changes and how they will affect your buying power.

Key Changes to the Mortgage Rules

The most important changes coming this December revolve around longer amortizations for insured mortgages and a higher cap on insured mortgage amounts. These reforms are expected to provide relief to many Canadians looking to purchase a home in today's challenging housing market.

1. 30-Year Amortizations for Insured Mortgages
   Previously, most insured mortgages in Canada were limited to 25-year amortizations. Starting in December 2024, first-time homebuyers and buyers of new builds will have the option to extend their amortizations to 30 years. This change will allow borrowers to stretch out their mortgage payments over a longer period, reducing monthly payments and improving affordability, especially in high-priced markets.

For example, extending a mortgage amortization from 25 years to 30 years could reduce monthly payments by up to 10%. This longer amortization is essentially similar to a 0.90% cut in mortgage rates, giving buyers a substantial financial advantage​. 

2. Increased Mortgage Insurance Cap
   The second major change is the increase in the mortgage insurance cap. Currently, the cap sits at $1 million, meaning buyers purchasing homes above this amount are not eligible for high loan-to-value mortgage insurance. As of December 2024, this cap will rise to $1.5 million. This is particularly important for homebuyers in expensive markets like Toronto, Vancouver, and other major cities where the average home price often exceeds the $1 million mark​.

The new rules will allow buyers to purchase homes up to $1.5 million with just a $125,000 down payment, compared to the $300,000 required for uninsured borrowers. This significantly lowers the barrier for many first-time buyers, making it easier to secure financing for higher-priced homes​.

Who Benefits the Most?

These changes are designed with specific buyers in mind. First-time homebuyers, buyers of new builds, and those looking for higher-priced homes will benefit most from the new rules. Here's why:

• First-Time Homebuyers: Extending the amortization period from 25 to 30 years lowers monthly payments, giving first-time buyers more flexibility and the ability to afford homes they may not have been able to under the previous rules. Lower monthly payments also make it easier for buyers to manage other financial obligations such as student loans or credit card debt.

• Buyers in Expensive Markets: With the mortgage insurance cap rising from $1 million to $1.5 million, buyers in high-cost regions like Vancouver or Toronto now have access to homes previously out of reach. The reduced down payment requirements mean they can secure financing without needing to save an enormous upfront amount​.

• New Home Buyers: If you’re purchasing a newly built home, you can also benefit from the extended amortization periods, provided the loan-to-value ratio is 80% or higher. Newly constructed homes or condos with interim occupancy periods will still qualify, making it easier for buyers to navigate today's unpredictable market.

How These Changes Affect Your Buying Power

By lowering monthly payments through longer amortizations and reducing down payment requirements for homes between $1 million and $1.5 million, the new rules effectively increase your purchasing power. With lower payments, buyers can afford more home for the same monthly budget. This is especially important as housing affordability remains a critical issue in many Canadian cities.

While these changes will help boost housing demand, some experts have noted that increasing purchasing power could also drive prices higher in the long term, as more buyers are able to enter the market​. Therefore, it's crucial to carefully consider how these changes fit within your overall financial plan and long-term goals.

How to Prepare for the Changes

If you’re planning to buy a home in the near future, it’s a good idea to start preparing now:

1. Evaluate Your Budget: With the potential for lower monthly payments, you may be able to afford a more expensive home. However, it’s essential to ensure you’re still within a comfortable budget, especially if interest rates rise in the future.

2. Save for a Down Payment: If you're eyeing a home priced above $1 million, the changes to the insured mortgage cap will reduce the amount you need for a down payment. Be ready to take advantage of this by saving as much as possible.

3. Talk to a Mortgage Broker: With these new rules in play, it’s more important than ever to work with a mortgage broker who can guide you through the process and help you find the best mortgage product for your needs.

Conclusion

The upcoming mortgage rule changes in 2024 represent a significant shift in how Canadians can approach home buying. By extending amortization periods and raising the mortgage insurance cap, these changes will make homeownership more attainable for many buyers, especially in high-cost markets. As the Canadian housing market evolves, these reforms could be key in making your dream of homeownership a reality. Stay informed and consult with professionals to make the most of these new opportunities.

Yet another change is in the pipeline for Canadian mortgage holders in 2024.

The Office of the Superintendent of Financial Institutions (OSFI) revealed last week to The Globe and Mail that it will eliminate the mortgage stress test for uninsured borrowers who plan to switch lenders upon renewing their loan. The borrower, however, must keep the same amortization schedule and current loan amount.

In practice, removing the test for renewing borrowers would encourage banks to offer more competitive rates to retain current customers, and make it easier for those with uninsured mortgages to change lenders. The new rules would take effect on November 21st, 2024.

“There are two primary reasons for this change. First, we are listening to what we have heard from industry and from Canadians about the imbalance between insured and uninsured mortgagors at the time of mortgage renewal,” said an OSFI spokesperson via email to the Toronto Star. “Second, when we look at the data over time, we have observed that the prudential risks that this was intended to address have not significantly materialized. As a prudential regulator we enable banks and lenders to compete and take reasonable risks.”

What are the current stress test rules, and how are they changing?

When a homebuyer takes out a mortgage loan with a federally regulated financial institution, they must pass the stress test to prove that they can cope with higher monthly payments in the event that interest rates were to rise or their income were to be reduced.

Under current rules, the minimum qualifying rate for uninsured mortgages is the mortgage contract rate plus 2%, or 5.25%, whichever is greater. Mortgage insurance is not required on loans with a down payment of 20% or more.

When an uninsured mortgage term comes up for renewal, under current rules, the borrower would be required to pass the stress test again if they intended to trade their current lender for a new one. In cases of a “straight switch,” where the borrower’s amortization schedule and loan amount stays the same, passing the stress test is still required. When OSFI’s updated policy takes effect on November 21st, uninsured borrowers will forgo any additional stress testing when their mortgage comes up for renewal if they plan to make a straight switch.

Those with insured mortgages – mandatory with a down payment of less than 20% – are not subject to the stress test if they are making a straight switch, as their mortgage insurance already protects the new lender from potential missed payments.

This latest change to mortgage financing rules quickly follows the federal government’s recent announcement to expand eligibility for 30-year amortizations on insured mortgages to all first-time homebuyers, and increase the mortgage insurance cap to $1.5 million, which will take effect on December 15th.

Buying a home is a significant financial commitment, and while the mortgage is often the largest expense, it's far from the only one. To ensure you're fully prepared for homeownership, it's essential to understand the various costs beyond your mortgage that you'll need to budget for. This article breaks down these additional expenses to help you plan effectively and avoid any financial surprises.

 1. Property Taxes

Property taxes are a recurring cost that homeowners must pay annually. These taxes are levied by local governments and fund services such as schools, road maintenance, and emergency services. The amount you owe is based on the assessed value of your property and the local tax rate.

• Tip: Check with your local municipality for an estimate of property taxes for homes in your area. Be sure to include this amount in your monthly budget.

 2. Home Insurance

Home insurance protects your property and belongings from risks such as fire, theft, and natural disasters. It also provides liability coverage in case someone is injured on your property. The cost of home insurance varies based on factors such as the size of your home, its location, and the coverage level you choose.

• Tip: Shop around for home insurance quotes and consider bundling your home and auto insurance for potential savings. Review your policy regularly to ensure it meets your needs.

 3. Utilities

Utilities are essential services that keep your home running smoothly. These typically include:

• Electricity: The cost of powering your home’s lighting, appliances, and electronics.

• Natural Gas or Heating Oil: Used for heating your home and, in some cases, for cooking.

• Water and Sewer: Charges for water usage and sewage services.

• Internet and Cable: Costs for internet access and television services.

• Tip: Estimate your utility costs based on your home size and usage patterns. Track your expenses over a few months to get a more accurate picture.

 4. Maintenance and Repairs

Homeownership comes with ongoing maintenance and repair responsibilities. Regular maintenance helps prevent costly repairs and keeps your home in good condition. Common maintenance tasks include:

• Cleaning Gutters: Preventing water damage and roof leaks.

• Landscaping: Maintaining your yard and garden.

• Seasonal Maintenance: Preparing your home for different seasons (e.g., winterizing pipes).

Additionally, unexpected repairs may arise, such as fixing a leaky roof or replacing a broken appliance.

• Tip: Set aside a maintenance fund, typically 1-3% of your home’s value annually, to cover both routine and unexpected repairs.

 5. Homeowners Association (HOA) Fees

If you live in a community with a homeowners association (HOA), you’ll likely be required to pay HOA fees. These fees fund the upkeep of common areas and community amenities, such as pools, parks, and clubhouses. HOA fees can vary significantly depending on the community and its services.

• Tip: Review HOA fee structures and understand what’s included before purchasing a home in an HOA-managed community. Factor these fees into your overall budget.

 6. Closing Costs

When buying a home, you’ll encounter closing costs, which are one-time expenses incurred during the home purchase process. These can include:

• Legal Fees: Costs for hiring a real estate lawyer or notary.

• Land Transfer Taxes: Taxes based on the purchase price of the home.

• Home Inspection Fees: Fees for inspecting the home’s condition before purchase.

• Appraisal Fees: Costs for appraising the home’s value.

• Tip: Closing costs typically range from 1.5% to 4% of the home’s purchase price. Be sure to budget for these expenses and review the breakdown with your real estate agent.

 7. Moving Costs

Moving to a new home involves various expenses, including hiring professional movers, renting moving trucks, and packing supplies. The cost of moving can vary based on the distance and the amount of belongings you need to transport.

• Tip: Get quotes from several moving companies and plan your move during off-peak times to potentially save money. Consider DIY options for a more budget-friendly approach.

 8. Property Upgrades and Renovations

Many homeowners invest in property upgrades and renovations to improve their home’s functionality and value. These can range from minor updates, like painting and landscaping, to major renovations, such as kitchen remodels or adding a new bathroom.

• Tip: Prioritize upgrades based on your needs and budget. Obtain quotes from contractors and set aside funds for future projects to avoid financial strain.

Conclusion

Understanding and budgeting for the costs beyond your mortgage is crucial for successful homeownership. By accounting for property taxes, insurance, utilities, maintenance, HOA fees, closing costs, moving expenses, and potential upgrades, you can create a comprehensive budget that prepares you for the financial responsibilities of owning a home. Being proactive and informed will help you manage these costs effectively and enjoy your home with peace of mind.

Canada’s central bank has made a third cut to its overnight lending rate this year, lowering borrowing costs for existing and aspiring homebuyers yet again.

In its scheduled September 2024 announcement, the Bank of Canada dropped the target for the overnight lending rate by 25 basis points to 4.25%.

In July, Canada’s Consumer Price Index rose 2.5% year-over-year, increasing at the slowest pace since March 2021. Continued easing of inflationary pressures were a contributing factor of the Bank’s decision to lower interest rates by another 25 basis points.

“Our decision reflects two main considerations. First, headline and core inflation have continued to ease as expected. Second, as inflation gets closer to target, we want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2% target. Inflation continues to reflect the push and pull of opposing forces. Overall weakness in the economy continues to pull inflation down. But price pressures in shelter and some other services are holding inflation up,” said Tiff Macklem, Governor of the Bank of Canada, in a press conference with reporters following the announcement.

“If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate. We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time,” he continued.

Three cuts down – more to go?

The third cut to the overnight lending rate comes at the start of the fall housing market, traditionally a time when buying and selling activity picks up across Canada. For those who have been sitting on the sidelines waiting for cheaper borrowing costs, another decrease to the overnight lending rate may be the extra sign of encouragement they’ve been waiting for.

According to a recent Royal LePage survey, conducted by Leger,1 51% of Canadians who put their home buying plans on hold the last two years said they would return to the market when the Bank of Canada reduced its key lending rate. Eighteen percent said they would wait for a cut of 50 to 100 basis points, and 23% said they’d need to see a cut of more than 100 basis points before considering resuming their search.

For today’s first-time homebuyers who face many financial obstacles on their path to home ownership, lower interest rates mean lower monthly mortgage payments and improved affordability. Another Royal LePage survey, conducted by Hill & Knowlton,2 revealed that three quarters (74%) of those in the next generation of homebuyers – Canadians belonging to the adult generation Z and young millennial cohort, born between 1986 and 2006 – say that owning a home is a priority for them and a milestone they hope to achieve in their lifetime. Buoyed by the prospect of lower borrowing costs, nearly one in five respondents (18%) who are planning to purchase a home say that their timeline to buy is within the next three years, and another 13% plan to buy in three to five years.

“The Bank of Canada continues its delicate balancing act, gradually easing the economic drag of high interest rates as the economy cools. With inflation now at its lowest point in three years, policy-makers are shifting their focus to jobs and housing,” said Phil Soper, president and CEO of Royal LePage. “For first-time homebuyers, the key question is whether to buy now or wait. Home values have largely plateaued this year, and improved affordability due to lower borrowing costs has benefited many. However, once the backlog of sidelined buyers is released into the market, pent-up demand will drive prices higher. This fall, we can expect more cautious Canadians to take the plunge, while those willing to take on the risk might hold out for further rate cuts.”

The Bank of Canada will make its next announcement on Wednesday, October 23rd.

Further interest rate cuts required to increase purchasing power and improve consumer confidence

According to the Royal LePage House Price Survey released today, the aggregate price of a home in Canada increased 1.9 per cent year over year to $824,300 in the second quarter of 2024. On a quarter-over-quarter basis, the national aggregate home price increased 1.5 per cent, despite a slowdown in activity in the country’s most expensive markets.

“Canada’s housing market is struggling to find a consistent rhythm, as the last three months clearly demonstrated,” said Phil Soper, president and CEO, Royal LePage. “Nationally, home prices rose while the number of properties bought and sold sagged; an unusual dynamic. The silver lining: inventory levels in many regions have climbed materially. This is the closest we’ve been to a balanced market in several years.

“This trend dominates activity in two of the country’s largest and most expensive markets, the greater regions of Toronto and Vancouver, where sales are down yet prices remain sticky,” Soper continued. “There are exceptions. In the prairie provinces and Quebec, low supply and tight competition persist.”

Despite the Bank of Canada’s move to cut the overnight lending rate by 25 basis points on June 5th, from 5.0 per cent to 4.75 per cent, buyers did not immediately rush back to the market as initially expected.

“This spring, with bank rate cuts highly anticipated, we saw some buyers race to get a deal done ahead of an expected spike in demand. Yet, when that first cut finally occurred in early June, market response was tepid,” said Soper.

“A change in monetary policy drives consumer behaviour in two important ways. Lower rates mean lower monthly payments, opening the door to some families previously shut out of the market. Secondly is the psychological signal broadcast to sidelined buyers that the tide is turning, and that market activity is about to pick up again,” added Soper. “Not surprisingly, the quarter-point cut to the bank rate didn’t substantially improve the affordability picture. As for consumer sentiment, our early year research indicated that only one in ten potential homebuyers would be motivated by a tiny rate drop. The tale the market tells as rate cuts get to the point of a material reduction in the cost of borrowing should be a very different one.”

According to a Royal LePage survey, conducted by Leger earlier this year, 51 per cent of sidelined homebuyers said they would resume their search if interest rates reversed. Ten per cent said a 25-basis-point drop would prompt them to jump back into the market, 18 per cent said they are waiting for a cut of 50 to 100 basis points, and 23 per cent said they need to see a cut of more than 100 basis points before they will consider resuming their search.

The Royal LePage National House Price Composite is compiled from proprietary property data nationally and regionally in 64 of the nation’s largest real estate markets. When broken out by housing type, the national median price of a single-family detached home increased 2.2 per cent year over year to $860,600, while the median price of a condominium increased 1.6 per cent year over year to $596,500. On a quarter-over-quarter basis, the median price of a single-family detached home increased 1.8 per cent, while the median price of a condominium increased 0.8 per cent. Price data, which includes both resale and new build, is provided by RPS Real Property Solutions, a leading Canadian real estate valuation company.

The national aggregate home price remains well above pre-pandemic levels. In the second quarter of 2024, the aggregate price of a home in Canada recorded an increase of 30.8 per cent over the same period in 2019.

“2024 marks the fifth year since the pandemic and post-pandemic rebound began to wreak havoc on real estate prices. Yes, values remain well above 2019 levels, yet a thirty per cent rise in home values spread over five years, or six per cent annually, is approaching long-term norms for Canadian residential property appreciation. The market has a way of correcting mistakes.”

Inflation and interest rates

For the last two years, the national housing market has seen home prices fluctuate between modest declines and increases – with some regional exceptions – as a result of the impacts of higher interest rates. As the Bank of Canada cautiously navigates the delicate balance between lowering the key lending rate and keeping inflation in check, some segments of Canada’s housing market have stalled.

“Canada’s housing market faces pent-up demand after two stifling years of high borrowing costs. While inflation control is crucial, persistently high rates are increasing the risk of a surge in demand when buyers inevitably return. New household formation and immigration keep fueling the need for housing, and a sudden release could create much market instability. This highlights the need for a more nuanced approach that balances inflation control with economic vitality,” added Soper.

“It is worth noting that once you remove the impact of high mortgage rates themselves from Canada’s Consumer Price Index calculation, inflation today sits well below the two per cent target.”

According to Statistics Canada’s latest report, Canada’s inflation rate rose to 2.9 per cent in May, up from 2.7 per cent in April. When shelter costs are removed, that figure dips to 1.5 per cent.

Increased borrowing costs slow new home construction

Elevated borrowing rates are not only dampening housing market activity but also stifling the construction of new homes. Builders, who rely heavily on lending, are finding it increasingly difficult to finance new projects, exacerbating the country’s shortage of housing at a time when our population continues to grow.

“Gradual interest rate reductions could unlock a housing supply logjam,” said Soper. “Lower rates would not only empower buyers but also incentivize builders, who rely on borrowing for development. This is crucial to meet the diverse needs of our growing population. We need affordable options for first-time buyers, growing families, and downsizing retirees. Incremental rate adjustments are key to achieving a balanced and inclusive housing market. Without a significant supply boost, prices will continue to rise, impacting both those who seek home ownership and the one-third of Canadians in rental markets.”

The Canada Mortgage and Housing Corporation (CMHC) reported a month-over-month increase in national housing starts in May, following two months of decline. In Vancouver, where competition for housing remains extremely tight, housing starts declined, while Toronto and Montreal posted a lift in starts. Still, the rate of new construction remains well below what is required to satisfy demand.

“Canada’s housing market faces complex challenges. While raising interest rates was crucial to fighting inflation, it has unintentionally choked off the essential flow of new housing supply. Higher borrowing costs, coupled with labour shortages in the construction trades and rising material prices, have made it economically unsustainable for developers to launch new projects. This creates a perfect storm – our population is growing steadily, yet we’re building far fewer homes than what’s needed to meet that demand. This situation urgently needs innovative solutions to ensure Canadians have access to affordable housing options,” concluded Soper.

Here's How to Prepare for Your Mortgage Renewal

More than half of Canadian mortgages will renew before the end of 2026, and with the Bank of Canada lowering its key interest rate from 5.0% to 4.75% on June 5th, many homeowners are now wondering which mortgage type they should opt for upon renewal — a fixed or variable rate. Understanding the options available and anticipating changes is essential to successfully navigating today's evolving mortgage landscape.

With a significant cohort of homeowners needing to renegotiate their mortgages within the next three years, those who opted for variable-rate mortgages -– or who took out a loan in 2021 at the trough of historically low rates — will be particularly affected by the planned adjustments. For those who will soon have to deal with the current higher-rate mortgage environment, below are some considerations to help you make an informed decision about an upcoming mortgage renewal.

Current Situation

While variable rates were historically lower during the height of the pandemic real estate boom, the trend has recently reversed, with variable rates now higher than fixed rates. The average five- year variable interest rate offered by mortgage lenders currently hovers around 6.7%, while most fixed rates are typically 5.6%.

A variable mortgage rate depends on a number of economic factors, such as the key overnight lending rate, which is set by the Bank of Canada. Although Canada's central bank recently cut its key rate for the first time in four years, the institution could change course if inflation levels increase in the months ahead. However, economists widely expect further cuts to the lending rate by the end of 2024. The trend is set to continue into 2025, unless economic conditions change significantly. Regardless of declining interest rates, the historically-low rates Canadians have been accustomed to over the last two decades are now a thing of the past.

What You Need to Know About Variable Rates

When it comes to variable-rate mortgages, when the prime rate rises – which is influenced by the Bank of Canada's overnight lending rate – mortgage payments automatically increase.

However, with variable loan structures with fixed-payment options, monthly payments remain unchanged, even in the event of a rate increase. Instead, this type of variable-rate mortgage adjusts the mortgage amortization period (the time it takes to repay the mortgage in full). This is due to the fact that a smaller proportion of each payment is allocated to repaying the mortgage principal.

Understanding Your Needs

The choice between a fixed- and variable-rate mortgage largely depends on the borrower's risk tolerance and personal situation. Since variable rates are subject to fluctuations, is your lifestyle conducive to these changes? Even if interest rates begin to fall, there are many economic factors influencing their direction, which can occur at various times during your mortgage term.

The right mortgage product for you depends on your short- and medium-term situation. If you're currently in a period of transition (career change, separation, etc.), you may want to opt for a fixed-rate that offers you some stability.

Strategic Options for Borrowers

Fixed-Rate Mortgage with a Shorter Term

Amidst economic uncertainty, more borrowers are opting for fixed-rate mortgages with shorter terms (one, two or three years). This way, in an environment where rates are quickly changing, borrowers can lock in predictable monthly payments without the need to stay with the same rate long term.

Hybrid-Rate Mortgage

This option combines customized features of both a variable and a fixed rate — part of the mortgage has a fixed interest rate and the other has a variable interest rate. This way, the borrower can benefit from the best of both worlds.

Convertible Mortgage

This type of loan offers the possibility of converting a variable interest rate loan into a fixed-rate mortgage, or vice versa, before maturity, thus allowing borrowers to adapt their mortgage financial strategy to market conditions.

Consult a Professional

At a time when real estate prices remain high due to sustained demand, choosing the right mortgage product is crucial. It is advisable to consult a mortgage broker to explore scenarios best suited to each individual situation. Anticipating interest rate fluctuations and adjusting your financial strategy accordingly can make a big difference in managing your long-term mortgage.

Have you noticed an increase in your electricity bill?

In early 2022, the government announced an increase in prices, but the bill to cap Hydro-Québec's distribution rates at 3% was finally passed last February.

Whether it's to reduce your expenses or to benefit the planet, here are some tips and tricks that can help you save energy and lower your electricity bill.

Improve air circulation

Ensure that vents are not blocked. Obstructed air vents cause decreased air circulation and force your ventilation system to work harder to maintain adequate airflow, which could result in higher than necessary energy consumption. In fact, 25% more energy is required to circulate air if these openings aren't completely clear.

Change your light bulbs

Replace incandescent light bulbs with energy-saving LEDs. These light bulbs have a long life and produce the same amount of light as incandescent bulbs while consuming less energy. Also, LEDs don't contain mercury, a toxic element present in incandescent bulbs, making them easily recyclable and an environmentally friendly choice.

Install a programmable thermostat

A programmable thermostat allows you to regulate the temperature in your home according to your schedule and habits. Ideally, the ambient temperature should not exceed 21 or 22 degrees. Know that by reducing the temperature in your home by 1°C, you could save as much as 5% to 7% on your energy bill.

Insulate your home

Your home's thermal insulation reduces heat and cold loss, which can save you money on heating and cooling. In order to do so, you can add or replace insulation in your walls, attic, floors, windows, doors and pipes. The materials commonly used as insulants are mineral wool, expanded polystyrene, polyurethane and cork. By properly insulating your home, you would not only save money on your energy bill, but you would also reduce your carbon footprint by reducing your home's greenhouse gas emissions.

Use energy-efficient appliances

Look for ENERGY STAR certified appliances, which are the most efficient when it comes to energy use. By choosing these appliances (refrigerators, dish washers, air conditioners, washers and driers), you can considerably reduce your energy consumption. According to ENERGY STAR, energy-efficient appliances can reduce energy consumption by 10% to 50% compared to standard appliances.

Turn off electronics on standby

Electronics continue to use electricity when on standby, so be sure to turn them off completely when they're not in use. TVs, computers, printers and gaming consoles continue to consume energy, even when they're on standby. This type of energy consumption is known as standby or phantom power. You can also turn off multiple appliances at once by using power bars with on/off switches.

Use thermal curtains

Thermal curtains can help reduce the amount of heat and cold lost through windows, which can save you money on heating and cooling. Thermal curtains are made from insulating materials which prevent hot air from escaping in the winter and cool air from escaping in the summer. In addition to being an efficient solution for reducing energy loss, thermal curtains can also add a layer of insulation to your windows, which can improve your comfort. By using thermal curtains, you can save money on your electricity bill and contribute to sustainable energy consumption.

You now have some simple tips and tricks to put in place to reduce your energy consumption and electricity bill. If you often work remotely or are planning home improvement projects, ensure your home insurance policy is adapted to your needs. The money you save on your electricity bills could be spent enjoying some free time as the good weather returns.

After holding the overnight lending rate at a two-decade high of 5% for 11 months, the Bank of Canada has reduced its policy rate. In its pre-scheduled announcement for June, Canada's central bank reduced the target for the overnight rate by 25 basis points to 4.75%.

Though inflation remains slightly above the BoC's target rate of 2%, the total consumer price index has fallen over the past year, signaling that core inflation has slowed and will continue on a downward trajectory.

“Governing Council decided monetary policy no longer needs to be as restrictive and lowered the policy interest rate by 25 basis points to 4.75%,” said Tiff Macklem, Governor of the Bank of Canada, in a statement to reporters following the announcement. “We've come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the 2% target has increased over recent months. The considerable progress we've made to restore price stability is welcome news for Canadians.”

What does this mean for Canada's housing market?

With the highly-anticipated interest rate cut now here, many rate-sensitive homebuyers will take this as a sign to move off the sidelines and back into the housing market.

According to a recent Royal LePage survey, conducted by Leger, 51% of Canadians who put their home buying plans on hold the last two years said they would return to the market when the Bank of Canada reduced its key lending rate. Ten per cent of respondents said a mere 25-basis-point-drop will prompt them to jump back in, 18% said they would wait for a cut of 50 to 100 basis points, and 23% said they'd need to see a cut of more than 100 basis points before considering resuming their search.

“The long-awaited cut to the overnight lending rate has arrived. The Bank of Canada held its key lending rate at a two-decade high of 5% for the past 11 months, and more than four years have passed since the last time that the rate was reduced,” said Phil Soper, president and CEO of Royal LePage. “Our research indicates that half of sidelined homebuyers in Canada plan to resume their home search plans once the bank rate begins to drop. This will no doubt spark activity and put upward pressure on home prices in the second half of the year.”

The Bank of Canada will make its next announcement on Wednesday, July 24th.

Canadian Renters' Bill of Rights

More Canadians are renting for longer periods of time before they transition into home ownership. The 2024 budget announced several measures intended to more effectively protect tenants and strengthen their path to buying real estate.

Budget 2024 announced the creation of the Canadian Renters' Bill of Rights, which proposes a nationwide standard lease agreement, and would require landlords to disclose rental price history on properties. Through the Canadian Mortgage Charter, the Budget also calls on banks and lenders to allow tenants to report their rental payment history to credit bureaus in order to better their credit scores, thereby strengthening their future mortgage applications.

Funding for the construction of new homes

The federal government is promising billions of dollars in spending towards the construction of new housing.

The 2024 budget unveiled the Canada Builds initiative, which will enable the country's Apartment Construction Loan Program to partner with provincial governments in order to build more rental accommodation. Starting next year, the program will receive $15 billion in additional funding for the creation of 30,000 new homes, topping up the program's current funding allocation to over $55 billion for a total of 131,000 units, set to be built by 2031.

30-year mortgage amortizations for first-time buyers of new homes

Through the Canadian Mortgage Charter, the 2024 budget announced that starting on August 1st, first-time buyers purchasing a newly-constructed home can access 30-year mortgage amortizations, a product that has previously only been available to those with a down payment of at least 20%.

Amendments to the Home Buyers' Plan

Saving for a down payment is one of the largest hurdles new homebuyers face. To make it easier to access funds for a home purchase, Budget 2024 unveiled an amendment to the withdrawal limit on the Home Buyers' Plan, which has been increased from $35,000 to $60,000 as of April 16th.

Support for single-family home suites

To encourage the creation of secondary housing units, the 2024 budget announced $409.6 million over four years towards a Canada Secondary Suite Loan Program, run by the CMHC. This will enable homeowners to borrow up to $40,000 in low-interest loans towards the cost of adding a secondary suite to their homes, which can be used for multi-generational living purposes or as a source of rental income.

Adjustable-rate mortgages (ARMs) offer borrowers a unique opportunity to take advantage of fluctuating interest rates, providing flexibility and potential cost savings over the life of the loan. However, ARMs also come with inherent risks and uncertainties that borrowers should carefully consider before choosing this type of mortgage. In this article, we'll explore the pros and cons of adjustable-rate mortgages and help you determine whether an ARM is the right choice for your homeownership needs.

Understanding Adjustable-Rate Mortgages (ARMs)

An adjustable-rate mortgage (ARM) is a type of home loan where the interest rate is not fixed for the entire term of the loan. Instead, the interest rate fluctuates periodically based on changes in an index, such as the prime rate or the London Interbank Offered Rate (LIBOR). Typically, ARMs have an initial fixed-rate period, followed by adjustable-rate periods where the interest rate can adjust annually or at specified intervals.

The Pros of Adjustable-Rate Mortgages

Lower Initial Interest Rates: ARMs often start with lower initial interest rates compared to fixed-rate mortgages, making them attractive to borrowers seeking lower monthly payments and potential savings during the initial fixed-rate period.

Potential for Lower Payments: If interest rates decrease or remain stable over time, borrowers with ARMs may benefit from lower monthly payments during the adjustable-rate periods, resulting in increased affordability and cash flow flexibility.

Short-Term Ownership: ARMs can be advantageous for borrowers who plan to sell or refinance their home within a few years, as they can take advantage of the lower initial interest rates without being exposed to the risks associated with long-term interest rate fluctuations.

Rate Caps and Limits: Most ARMs include rate caps and limits that restrict how much the interest rate can increase or decrease during each adjustment period and over the life of the loan, providing borrowers with a level of protection against drastic rate changes.

The Cons of Adjustable-Rate Mortgages

Interest Rate Risk: One of the main drawbacks of ARMs is the uncertainty surrounding future interest rate movements. If interest rates rise significantly during the adjustable-rate periods, borrowers could face higher monthly payments and increased financial strain.

Payment Shock: Rapid increases in interest rates can lead to payment shock for ARM borrowers, causing a significant and sudden jump in monthly mortgage payments that may be difficult to afford, especially for borrowers on fixed incomes.

Budgeting Challenges: The fluctuating nature of ARM payments can make budgeting and financial planning more challenging for borrowers, as they may need to account for potential changes in their housing expenses over time.

Long-Term Costs: While ARMs may offer lower initial interest rates, borrowers who hold onto their mortgages for extended periods may end up paying more in interest over the life of the loan if interest rates rise significantly during the adjustable-rate periods.

Is an ARM Right forYou?

Deciding whether an adjustable-rate mortgage is the right choice for your homeownership needs depends on various factors, including your financial situation, risk tolerance, and future plans. Consider the following questions:

Are you comfortable with the potential for fluctuating interest rates and payments?

Do you plan to stay in your home for the long term or sell/refinance within a few years?

How do current interest rate trends and economic conditions impact your decision?

Have you thoroughly reviewed and understand the terms, features, and risks associated with the ARM product?

Ultimately, consulting with a qualified mortgage advisor or financial planner can provide valuable guidance and assistance in evaluating your options and determining whether an ARM aligns with your financial goals and preferences.

National median house price forecast to increase 5.0% in Canada's recreational market in 2024 as re-engaged buyers compete for limited supply

According to Royal LePage, the median price of a single-family home in Canada's recreational regions is forecast to increase 5.0 per cent in 2024 to $678,930, compared to 2023, as a boost in consumer confidence will bring sidelined buyers back to the market. All of Canada's provincial recreational markets are forecast to see an increase in single-family home prices in 2024. Ontario is forecasting the greatest price appreciation, at 8.0 per cent.

“Across the nation there was a sizable rise in demand for all types of housing during the pandemic, but nothing could match the 'gold rush fever' that occurred in recreational property markets,” said Phil Soper, president and CEO, Royal LePage. “With city offices closed and the wide availability of high-speed internet allowing people to take video meetings on lakefronts and mountain tops, excess demand pushed recreational property prices to unprecedented heights.

“Inflation reared its ugly head, interest rates soared and the economic downturn that followed pushed cottage, cabin and chalet prices off those pandemic peaks, yet the fundamental demand for recreational living has not abated. We believe that this market segment will see a resurgence of activity in 2024,” continued Soper.

In 2023, the weighted median price of a single-family home in Canada's recreational property regions decreased 1.0 per cent year over year to $646,600. This follows a year-over-year price decline of 11.7 per cent in 2022. When broken out by housing type, the weighted median price of a single-family waterfront property decreased 7.9 per cent year over year to $1,075,500 in 2023, and the weighted median price of a standard condominium decreased 1.5 per cent to $420,300 during the same period. Despite a modest decrease over the past year, the national weighted median single-family home price remains 59 per cent above 2019 levels.

“Demand has been building quietly on the sidelines,” said Soper. “Our regional experts tell us that buyer interest is steadily ramping up as the spring market approaches. With hybrid office and work-from-home business models being the norm now, many working people see the opportunity to make much better use of country properties.”

As homebuyers sought out more space, privacy and access to nature during the height of the COVID-19 pandemic, many recreational real estate markets experienced a deep cut to their available home supply as buying activity soared. Although demand has since leveled off from historical highs, markets continue to grapple with low inventory levels.

According to a survey of 150 Royal LePage recreational real estate market professionals across the country, 41 per cent of respondents reported less inventory compared to the same time last year; 33 per cent of respondents said that their region has similar levels of inventory. However, 64 per cent reported similar or more demand from buyers for recreational homes. This sustained and growing demand for a limited number of available properties is expected to put upward price pressure on Canada's recreational market. Interest rate cuts could trigger market revival

Royal LePage recreational property advisors predict that buying activity will intensify when the Bank of Canada begins to make cuts to the overnight lending rate. Sixty-two per cent of experts said they believe demand will increase slightly in their region when interest rate cuts are made, while 21 per cent expect demand will increase significantly.

“Cash plays a larger role in the purchase of recreational property than with urban homes, yet the vast majority of buyers finance at least part of their purchases,” noted Soper. According to the survey, 78 per cent of experts said that recreational property buyers in their region typically obtain financing, such as a loan or mortgage.

“Recreational property purchases are not as heavily impacted by mortgage rates as those in the residential market. That said, consumer confidence in general will get a boost when we see a cut to the Bank of Canada's key lending rate, expected later this year. This lift in activity will put upward pressure on prices. And, if this coincides with an influx of inventory, we should see a boost in sales as well.”

Recreational lifestyle remains attractive to Canadians Nationally, 59 per cent of recreational real estate experts surveyed said that homeowners in their region typically use their properties as a secondary residence or vacation home. A smaller cohort, 21 per cent, said that owners tend to use their recreational homes partly as a vacation home and partly as a rental property. The majority of buyer demand for recreational properties comes from those aged 50 to 64, according to 57 per cent of experts.

“Though recreational trends are specific to the individual regions, we can confidently say that most Canadians who own a cottage or cabin use it for their own life-enriching purposes,” added Soper. “It's a testament to our recreational communities and the lifestyle they afford Canadians that most of those who relocated to cottage country during the pandemic are staying put.”

While some homeowners relocated full-time to a recreational region during the pandemic, 55 per cent of recreational experts nationally said that it is not a common trend for those homeowners to return to urban or suburban communities as a result of changes to their remote work capabilities or preference in lifestyle. There are several recreational regions in Canada that are home to lively year-round communities.

“Whether it's for retirement or a summer vacation destination, we anticipate that more Canadians will look to embrace recreational living this year as lower borrowing costs bring their recreational home aspirations closer within their reach,” concluded Soper.