Mortgage 101 – Why the Real Estate Market Just Woke Up

Dan Ahlstrand and Clinton Wilkins discuss the impact of the Bank of Canada’s decision to hold the key overnight rate steady on the Canadian real estate market.

<strong>Bank of Canada’s Decision</strong>

Dan Ahlstrand
All right, welcome to the May edition of Mortgage 101. I’m Dan Ahlstrand. In the studio with me today, as he always is, our mortgage guru, and that’s Clinton Wilkins. Clinton, how are you?

Clinton Wilkins
One day, I’ll probably have to give somebody to fill in. But we’re going eight or nine years strong here, and I don’t want to break the streak.

Dan Ahlstrand
This is Guinness territory here, and we’re not talking about pints.

Clinton Wilkins
I mean, this is true. How many Mortgage 101’s? Can you do without missing one? Right? I think maybe we’re getting up there.

Dan Ahlstrand
We’ll set some sort of record.

Clinton Wilkins
We’re very heavy into spring now, deep, deep into spring, and it’s starting to feel maybe like spring. Maybe spring is actually here. I can tell you, from a real estate market perspective, it’s starting to feel like spring as well. So that’s great news on our side of things.

Dan Ahlstrand
Let’s start with what everybody was watching, and that, of course, was the Bank of Canada. There was some consternation. There was some hand-wringing. All right, the economy’s in kind of rough shape. Energy prices are through the roof, but the Bank of Canada decided to hold steady, kind of like the way you predicted it was going to happen. Clinton, give you your due credit, where credit is due. That being said, what does that do to the real estate market? Does that keep people on the sidelines, or does that encourage people that they’re like, all right, I got three more months of stability.

Clinton Wilkins
Well, let’s back it up. I think even before the announcement happened, a lot of the economists were basically projecting that the Bank of Canada would lower the key overnight rate. I know everyone thinks that rates are always going up, but lower the key overnight rate if it wasn’t for what was going on with the oil and what was going on in Iran. I mean, they’re obviously connected. Now that is the biggest influencer. I think keeping these rates where they’re at, from an economic standpoint, GDP is not doing a very good job. Numbers really atrocious. And inflation is actually in a pretty good spot, especially if you take out that fuel cost inflation; we’re doing pretty well here in Canada. So I’m in a wait-and-see type situation. I was projecting going into this that it was going to be a hold, and the economists were saying, even, like, days in advance, that it was going to be, but it’ll be interesting to see what happens. Obviously, the fuel costs are one big factor. And, potentially, they have to play with this key overnight rate depending on what happens with fuel. We don’t want to be in a situation where we’ve run out of jet fuel, or it’s $4 a litre at the pumps or something like that. So, it’s a wait-and-see. I’m cautiously optimistic. I hope that things will be solved with the oil situation and Iran quickly. Again, it might be a week away, a month away, six months away, who knows, but we’re obviously going to continue to watch it. But it’s the other kind of indicators that I’m really, really watching every day.

<strong>Variable Mortgage Rates and Economic Indicators</strong>

Dan Ahlstrand
Before we get to those indicators, Clinton, I would imagine there was, there was a portion of the market out there that was holding a mortgage, particularly those in the variable realm, that were maybe hoping for a rate reduction because their mortgage gets cheaper.

Clinton Wilkins
I think it’ll really have to depend on what’s happening with these other indicators. If the oil situation has been resolved, we very possibly may see the rates go down, TBD, obviously, that’s one thing that we’re watching. It’s not the only influencer, though. Again, the GDP has not been strong. But the one thing that I think all Canadians are watching is when these job numbers get released, I think we were down 95,000 jobs, or something like that. That is a significant number of job reductions here in Canada. It’s impacting people here in Nova Scotia and really across the country.

Dan Ahlstrand
We’ve also talked about the fixed mortgage rate market, and we know that that kind of lives in the bond market, and with the geopolitical situation around the world and the state that it’s in, that is a little bit more is it more volatile.

Clinton Wilkins
I would say it’s almost more volatile. I think in some cases, these lenders have held the rate for as long as they can, and they might have even been selling mortgages, in theory, at a loss, to try to keep these rates as stable as possible. But there’s a huge variance in what different lenders are offering. Obviously, what’s going on with the bond market? It’s all based on the cost of funds. And what? I would not be surprised, depending on what happens with the bond market. If those margins are still being compressed, if we see rates edging up a little bit, or maybe rates becoming more consistent between lenders, I think right now we can see, almost as much as about 100 basis points different, sometimes, between products and lenders. And it’s really, really all over the place, which is challenging, I think, for customers to even understand. I think normally we see customers and lenders having, like, a 5, 10, 20 basis point difference between the different products and stuff. But we’re seeing much more variance right now, which is very challenging. It’s hard for customers to understand.

<strong>Stability vs. Volatility in Mortgage Rates</strong>

Dan Ahlstrand
I’ve been talking to people who are in the market then, or are potentially joining the market, and are watching world events, and they’re too. Towards that fixed market, even though it’s more expensive, but because it’s there’s stability attached to it. And in today’s world, things change by the minute. What’s the best route? Or is it based on a personal decision, or on each case?

Clinton Wilkins
I think it’s based on the individual. To be frank, stability has a cost, but sometimes stability has a value. What is that ultimate cost, and are you willing to spend it to know what you have for the stability? Now, there are some downsides to a fixed rate as well if you were to break that mortgage early. And to be frank, a lot of customers do break their mortgage early, especially if you’re taking a five-year fixed rate. A lot has changed in five years. I’m just even thinking about my own life. Dan, think about your life. How much has changed in the last five years? And our producers, they’re going through life changes every single day. And, if you break a fixed-rate mortgage early, you could pay a much larger penalty. Yes, you might only pay three months interest, like you would on a variable, but you could pay a much larger penalty, like interest rate differential, and that’s all based on what the cost of funds were at the time you took the mortgage out, and basically, where are the rates at the time that you break the mortgage and how long is left on your term? So there’s not a crystal ball for me to tell you what your penalty is going to be, but one thing I can tell you is the bigger the variance, the bigger he variance is between what your rate is and what the rates are of the day, and the longer you have left on your term, the bigger the penalty. I’ve seen some of these penalties be like $1,000, not so bad. I’ve seen some of these penalties be 20, 30, $40,000, so buyer beware. If you’re taking a fixed rate and know that you’re staying in it, and I think everyone’s intentions are like, I’m never breaking this mortgage. I think nobody wants to pay a penalty. I don’t, but guess what? I pay penalties in my life. My life changes. And I can tell you our customers, they’re paying penalties every day because things change. They either need to refinance or sell, and a variety of things are changing people’s lives; maybe refinancing does make sense. So, I think you have to be cautious when you go into any type of term, and that’s why it’s so important for you to get that advice. And the advice is really great. Having the stability, knowing what your payment is going to be, I think that is awesome. I like knowing what my payment is going to be, but you need to know what the downsides are as well. The interesting thing is, some lenders offer a variable-rate mortgage payment that has a static payment, so the amortization changes when the prime rate changes. Not every lender does it like that. A lot have an adjustable payment. prime changes, the payment changes, right? But some lenders have amortization changes, and the payment stays static. So, sometimes, if people want to dip their toe in the water with a variable rate, having a static payment is a good way to kind of transition into such a product. And I think the big thing is, like, if you’re going to take a variable, you need to have someone that’s to have someone that’s going to be on your side watching it and also giving you the advice if you need to maybe convert into a fixed or maybe change something with your product. And I think that’s why mortgage brokers really have a lot of value. It’s not just about the rate. Someone’s always going to do it cheaper, Dan, and that’s what I tell my clients every day: do you want to be in business with me for the next 25 years, getting the feedback, getting the value. We don’t do so many, like education,n and events and all this stuff. Or do you want to be in business with the branch where it’s constant turnover and no one’s really managing your relationship? Someone will always do it cheaper. And I think that’s where you just need to figure out what that value is.

Dan Ahlstrand
We mentioned that spring has sprung. Earlier this week, we saw the patios out, people enjoying the sunshine. We’re finally getting it. Thank goodness. Of what is to come. What’s the market like? We know that spring is a busy time for people to get into the market. What’s the real estate market looking like this month?

Clinton Wilkins
Normally, the purchases start going wild around the middle to the end of March. We saw a very slow uptick in purchases, really going into April. But I can tell you, the last week, 10 days, the purchases have been wild. I’ve not seen something like this, probably since pre covid. The transactions are wild. The inquiries are wild. We’re getting form fills on our website multiple times, every single day, and we’re seeing a lot of people get accepted offers. We didn’t see that a month ago, something, something has really shifted in the real estate market, where there’s going to be a lot more activity. And I think we’re going to see that now going forward, between now and into the summer. And I think maybe it was a little bit delayed this year, Dan, and it could have been because of the weather. We didn’t, haven’t had the best spring, to be frank. Once the weather starts getting better, we’ll see the green grass. You can kind of visualize and see what you’re buying. And I think maybe there was a delay in the normal buying, the frequency of customers, due to kind of the temperature and the weather outside.

<strong>Challenges and Opportunities in the Real Estate Market</strong>

Dan Ahlstrand
It certainly spurs on everything, right? People are outside. They’re a little bit looser. You get a chance to see the property, and it’s in its summer state, right? You get to check foundations, you can check backyards, you can do all those kinds of things.

Clinton Wilkins
I know, and I always get this, like, idealist. Or something idea in my head, and I really started looking at second homes every time spring comes around, because I’m like, what? Maybe this is a year that I buy a cottage again, because I sold mine in 2019, so our listeners know that probably wasn’t the best idea. I’ve never made that like the, I’ve never sold any real estate at the top, top of the market, but I always get this idea that maybe it’s time for me to have a second home again. And, enjoy maybe a little quieter time outside the city, and I kind of talk myself out of it half the time. So we’ll see.

Dan Ahlstrand
We’re going to take our first break here on Mortgage 101 for this month’s edition. When we come back, Clinton, it’s something that I see the commercials on, yeah, many people out there see commercials on, and that are these, these chip mortgages. We’re going to dig into that when we come back.