Falling property prices are hardly fun for anyone, except perhaps bargain hunters.
In the mortgage space, rapid price increases in 2021 and 2022 are likely to result in delayed settlement for certain borrowers next year.
In particular, your options for renewal or refinancing may be limited due to declining values.
Below I will lay out the mechanisms and then explain why they are important.
Think about “loan-to-value”
Property value has a direct impact on both the equity you have accumulated and the range of mortgage options available to you.
Property values vary greatly depending on the region. To illustrate, imagine you are the “average” Canadian who purchased an average-priced home at the average fixed mortgage rate in 2021, 2022, or 2023.
Here are examples of how equity levels can change in unexpected ways:
- For example, if you made a five percent down payment five years ago and purchased default insurance, your mortgage balance might be about 84 percent of your home's value. Lenders refer to this as a “loan-to-value” or “LTV” of 84 percent.
- Meanwhile, if you purchased after 2021 and didn't make any prepayments, your LTV may look worse (higher) because interest rates increased and you had less time to pay off the principal.
- In comparison, if you bought with a 20 percent down payment long before or after the price peak in early 2022, you're probably in a much better position. That's because your principal payments have likely reduced your mortgage balance faster than your home's value has decreased.
- There are exceptions, however: If you bought within a few months of the February 2022 peak, even at a 20 percent discount, you may be among the minority of borrowers (in select markets) who are defaulting on their mortgage—that is, owing more than the home is worth.
The point is that there is a good chance that in 2026 and 2027 we will see more people needing mortgage relief but finding that their loan-to-value ratio gives them fewer options than they had hoped.
Quick tip:
To get a rough idea of your equity, check your local real estate agency's average price change for similar homes in your area since the time of your purchase. Apply this change in value to your property and then compare it to your mortgage balance. You can also use an online automated appraisal tool or consult a real estate agent or mortgage broker.
What to do about it?
If you have a mortgage that accounts for more than 80 percent of your property value, that means two things:
On the one hand, refinancing is generally off the table – at least not when key interest rates are low. A standard refinancing requires 20 percent equity or more.
You may be able to find a small unsecured line of credit or take out a loan against other assets. Or perhaps you can find a private lender that will give you a second mortgage of up to 85 percent of your property's value, but you'll pay double-digit interest rates on this riskier financing. And if you own a condo in a slow market, forget about it altogether.
Secondly, a loan-to-value ratio of over 80 percent also excludes a change of lender – if your mortgage is not insured. This is because established lenders require default insurance on such “high interest” mortgages.
As a result, the uninsured, high-LTV borrower is locked into whatever interest rate and terms their existing lender is charitable enough to offer—unless they can find cash elsewhere to pay down the mortgage to 80 percent of the property's value.
And guess what? Lenders are not naive. They know approximately how much equity you have because they regularly monitor the property values of the loans in their portfolios.
This means they also know when your options are running low. So don't be shocked if the renewal offer looks less attractive after your home has lost value.
For those with insured mortgages who want to switch lenders, the prospects are improving significantly. As long as you qualify, there are lenders who don't care if your loan-to-value ratio is high (in the 90 percent range) because the insurer will take on the risk if you don't pay.
Two side notes:
- If your loan-to-value ratio is over 100 percent, you may have a difficult time finding a mortgage lender that will accept your application, even though insurers like the Canada Mortgage and Housing Corporation (CMHC) technically allow such borrowers to switch lenders. Lenders are never interested in adding underwater mortgages to their portfolios. I've heard of some who accept it if the original purchase price is used for “property value”, but I can't support that.
- You can switch lenders without having to pass the government's mortgage stress test. That means you don't have to prove you can afford an interest rate that's more than 200 basis points higher, making it easier to qualify. To benefit from this exemption, you must maintain the same loan amount, repayment, etc.
And one final point about insured mortgages: Insured interest rates are the lowest in the country and are often 25 basis points or more below uninsured rates. The switching flexibility and rate savings make it arguably worth paying the insurance premium in turbulent markets like we saw three to four years ago – assuming you plan to stay in your home for more than ten years.
Present your options early on
Falling property values are hurting mortgage options, and people living in Ground Zero (Toronto and Vancouver) could feel the brunt of this next year.
And as we speak, preliminary data from digital real estate company Wahi shows average GTA house prices fell another 0.7 percent in the first half of December. If it stays that way, that would be a decline of 6.2 percent compared to the previous year.
Insured borrowers who purchased with a low down payment and uninsured borrowers whose value has declined significantly since financing should speak to an experienced mortgage advisor early – ideally no more than a week before renewal – to weigh options.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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