How COVID-19 is Affecting Mortgages and the Real Estate Market in Canada

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It’s hard to turn on the TV these days and not hear about the coronavirus. The coronavirus is a global pandemic. It’s changed the way we live our lives. Countries all across the world including Canada and the U.S. are in lockdown until the situation is under control.

What does the coronavirus mean for those looking to buy a home and sign up for a mortgage?

Let’s take a closer look.

Fixed Mortgage Rates Went Down Due to Coronavirus, Then Up

Ever since the start of the year when the coronavirus first started to become an issue, the Government of Canada bond yields have been on a downward trajectory. (Government of Canada bond yields determine the pricing of fixed mortgage rates. A bond yield is the return an investor earns on a bond.) As a result, fixed mortgage rates fell off a cliff in January and February.

It may be hard to believe, but fixed mortgage rates actually started to go up in the last couple weeks. This wasn’t because of the Government of Canada bond yields heading higher. While this is certainly a big factor in the pricing of fixed mortgages, it was due to a lack of liquidity in the mortgage market. 

Liquidity is a fancy way of saying how easily and cheaply lenders can raise money. When the banks lack liquidity, it’s bad news for mortgage rates and causes them to go higher. (This same thing happened during the financial crisis in 2007-08).

The Bank of Canada has tried to inject some liquidity into the markets, but it will take some time to trickle through and reflect in the fixed mortgage rates.

What does it mean for existing homeowners with a fixed rate mortgage?

Not much. Your fixed mortgage rate will stay the same.

What does this mean for homebuyers looking to sign up for a fixed rate mortgage?

 It means that fixed mortgage rates will be higher for the time being. Although it doesn’t necessary affect how much you can afford to spend on a property, it will affect the carrying cost of any home that you buy. A higher mortgage rate means that your mortgage payments will be higher, all things considered equal.

This means that when you factor in all your other household expenses (car payments, childcare, groceries, etc.) you might not be able to afford to spend as much on a home anymore due to the higher mortgage rates.

Variable Mortgage Rates Went Down, Discount off Prime Rate Reduced for New Borrowers

Variable mortgage rates are priced based on a mortgage lender’s prime rate. (Prime rate is the interest rate lenders offer to their most creditworthy customers.) Lenders set their prime rate based on interest rates set by the Bank of Canada.

The Bank of Canada’s original plan was to hike interest rates. However, it hit a brick wall in 2018 and 2019 when the Canadian economy didn’t grow as fast as anticipated, so the Bank of Canada put its plans of hiking rates on hold. Interest rates didn’t change for a while. Then the whole coronavirus situation happened.

The Bank of Canada has since cut interest rates twice in March; once by 0.50 percent on its last scheduled announcement and once by 0.50 percent as an emergency interest rate cut (on a Friday afternoon no less). Mortgage lenders cut the prime rate twice by the same amount.

If you’re a homeowner with a variable rate mortgage, this is good news for you.

 Your interest savings are immediate. More of your money will go towards principal and less towards interest. This means that you’ll pay less interest over the life of your mortgage and could pay it off months or years sooner.

If you’re a homebuyer, a lower prime rate is also good news for you.

Although lenders aren’t offering as big of a discount off prime rate as they once were, with prime rate as low as it is today, you can still save yourself a decent chunk of change.

While you won’t qualify to spend more on a home due to the way the mortgage stress test is calculated, your mortgage payments will be lower as a result of the lower variable mortgage rates. Because of this, when you factor in all your other household expenses, you might be able to afford to spend more on a property.

Mortgage Stress Test Boosts Purchasing Power by 2%

The federal government had planned to loosen the stress test for those putting down less than 20 percent; however, due to the coronavirus it has postponed this change indefinitely.

However, with the big banks cutting their posted mortgage rates in response to a weakening Canadian economy, there is a benefit to homebuyers and homeowners looking to move mortgage lenders on renewal.

The qualifying rate used for the mortgage stress test has dropped. It’s gone down from 5.19 percent to 5.04 percent. This is a huge psychological boost for homebuyers, upping the maximum purchasing power for the average homebuyer by about two percent.

Hopefully once Coronavirus is resolved, we’ll see the government loosen the stress test on insured and conventional mortgages as it promised to do (at least on the insured side). This would let the average homebuyer spend two percent more on a home (in addition to the two percent mentioned above).

How Will the Spring Real Estate Market Fare?

The real estate market is an interesting one. At first the coronavirus wasn’t having that much of an impact on the market. If anything the low mortgage rates seen in January and February from coronavirus led to more activity. However, in early March we seemed to have reached a tipping point.

When the World Health Organization announced that the coronavirus was a pandemic and the government started recommending social distancing, it changed everything. Although some real estate agents have been busy, homebuyers are increasingly no longer willing to view properties for health reasons. Most are taking the government’s recommendation of social distancing seriously and aren’t willing to take the chance by viewing properties.

Most real estate agents are no longer doing open houses to help slow the spread of the coronavirus (although private showings are still taking place). Fewer people seeing a place is good news for homebuyers and not so good news for home sellers. As a homebuyer it means you can expect to pay less for a home, while for home sellers it can mean your home will sell for less.

Tips to Still View a Home During Coronavirus

  • Use hand santizer before and after entering the home.

Some homebuyers are getting creative though. If you’re not comfortable stepping inside a home, but you’re really motivated to buy a home, there are still ways to view it, while protecting yourself from coronavirus. You can exhibit social distancing when viewing a home. 

  • Virtually view home using cameras.

If you’re not comfortable viewing a home in person, thanks to technology there are other ways. Similarly, you can always look at the outside of the home. Each homebuyer’s level of comfort is different.

If social distancing continues on well into the spring real estate market, we’re likely to see a slower spring market than usual. This means you can expect your home-buying dollar to go further as a homebuyer, since homes should be more affordable. But that doesn’t mean that Canadians won’t buy homes. Many will just delay their home purchase.

Once everything gets back to normal and coronavirus is under control (hopefully sooner rather than later), expect to see the real estate market really pick up. All of a sudden homebuyers that were sitting on the sidelines will rush into the real estate market all at once, which should help balance out a slower real estate market at the beginning of the year. This should cause home prices to go higher in the latter half of the year (or whenever Canada’s coronavirus case count starts to go down).

A lot depends on how the coronavirus situation plays out and how quickly health officials can get it under control, but this is how I see things going if coronavirus is under control by the summer (hopefully a lot sooner).

Summary: Lower Mortgage Rates and a Slow Spring Real Estate Market

Although it’s tough to predict where things are heading, it looks like the short-term mortgage rates will remain where they are and the real estate market will be slower than normal. That being said, if you’re a motivated buyer, you’ll likely find a way to buy a home, even if it means not stepping foot inside.

It’s also important to factor in your employment situation when applying for a mortgage.

  • Could the coronavirus affect your job stability?
  • Could it lead to a layoff at your workplace?

If you’re in a rock solid industry like the government you’re probably fine, but if you work in an industry that’s affected by coronavirus like the airline industry, then you might want to put your real estate search on hold until the coronavirus situation is resolved.

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Sean Cooper

Sean Cooper is the bestselling author of the book, "Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians". He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. Sean is a personal finance journalist, money coach and speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.

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