Canada’s real estate market has rebounded stronger than Wilt Chamberlain in his prime. National average prices are now up a blazing 19 per cent from the January low, according to the Canadian Real Estate Association (CREA).
That’s comforting if you’re a homeowner who likes to watch your equity grow. Not so much if you’re a Canadian struggling to buy.
In fact, mortgage payments on a typical home have never been higher, based on CREA’s average home price, 20-per-cent down and the lowest five-year rates, as tracked by MortgageLogic.news.
Lowest fixed and variable mortgage rates in Canada for June 16 2023
For those who can’t qualify with the minimum 5.0 to 7.5-per-cent down payment, a standard mortgage and a 25-year amortization, the choices are generally: keep living with family; take your chances in the feverish rental market; or get creative.
That said, I wouldn’t advocate buying right now if you don’t need a long-term home or are not well-qualified and risk tolerant. For one thing, the Bank of Canada just rained on the parade with another rate hike, and more showers are in the forecast.
Nevertheless, borrowers are still shoehorning themselves into home purchases, creatively or otherwise, and here’s how some are doing it.
Extending amortizations
The share of new mortgages with amortizations over 25 years hit a high last quarter, according to Bank of Canada data back to 2014. More than 48 per cent of mortgagors opted for extended amortizations, mostly 30 years.
On a $400,000 mortgage at 5.49 per cent, for example, that extra five years lowers your payment by $186 per month. Not insignificant if you’re just scraping by.
Note that purchasers must generally put down at least 20 per cent to get a 30-year amortization. Some institutional non-prime lenders go up to 40 years, but you’ll often pay at least a 50 to 100 bps higher rate for the flexibility.
Six-month mortgages
Marathon Mortgage Corp. just launched a new six-month mortgage at 4.50 per cent for default-insured borrowers. Who would want a mortgage term that short?
Someone who needs an easier mortgage stress test.
“We’re giving significant buying power back to the client, over $100,000 in some cases,” says Albert Collu, Marathon’s CEO.
The trade-off is that you’ll pay a 1-per-cent fee if you don’t renew with the lender after six months. And you must renew into a fixed term of three or more years.
True North Mortgage has a similar product at a lower up-front rate (3.79 per cent through Monday). But it says it charges an “added premium” at renewal. True North does let you renew into a flexible adjustable-rate mortgage, however, currently priced at 5.75 per cent plus any renewal premium.
Non-stress-tested mortgages
Whereas banks make you prove you can afford payments based on theoretical rates 200 bps higher than what you actually pay, many non-prime lenders and credit unions do not.
With the latter, you can sidestep the government’s stress test altogether on uninsured mortgages. You simply need to prove you can handle payments at your actual rate, like in the old days (pre-2018).
The lowest rates for these “contract-rate qualifier” mortgages, as they’re called, currently start around 5.69 per cent to 6.29 per cent, depending on the province. That’s not dramatically higher than Big Bank rates, and the extra buying power can get you up to 12 per cent more house.
Apart from these options, some banks allow higher debt ratio limits, meaning you can qualify for more based on your income – even with the stress test. But in return for this flexibility, you’ll never get the best interest rates, especially if you have less than 35 per cent equity. Mortgage brokers are the top source for contract-rate qualifying.
Shared equity mortgages
One way to qualify for more home is to put more money down. According to an Ipsos/BMO survey, 41 per cent plan to borrow their down payment, and 19 per cent expect help from family and friends. For those who don’t have/want those options, shared equity mortgages are another strategy.
Shared equity is where you partner with an investor that gives you 5 to 15 per cent of the purchase price in exchange for a percentage of your upside if the property appreciates. The investor gets paid back when you sell, refinance or a specified number of years elapse – and they share in the downside if prices fall and you sell.
For affordability, the benefit is that your loan amount is smaller, so your mortgage payments and default insurance costs (if any) are smaller. Instead of putting just 5 per cent down, you can put down up to 20 per cent, with investor help. The lower mortgage amount makes it easier to qualify for a given income.
Examples of shared-equity providers include:
- CMHC (via its First Time Home Buyer Incentive; prime rates)
- Options for Homes (Select condos in the GTA only; prime rates)
- Lotly (Greater Toronto Area only; non-prime rates)
- Ourboro (GTA, Guelph, Kitchener-Waterloo, and London, Ont., only; prime rates)
Google “shared equity mortgage” and you may find some local municipal and provincial programs as well.
Shared equity mortgages are designed to get you in the door. Once you’re able to refinance – which may take five to seven years, for example – it usually behooves you to pay the investor off and stop sharing equity.
Some of the most flexible shared equity providers are only compatible with non-prime lenders, which charge 50 to 100-plus basis point rate premiums. Various fees apply as well.
Fortunately, there are now multiple prime lenders willing to refinance someone with a shared equity mortgage – at their best available rates, says mortgage broker Gary Fooks of 8Twelve Mortgage Corp. “That’s a win for consumers,” he says, because years back there were virtually no such options.
Shared equity could take off once more prime lenders support the arrangements. The federal banking regulator cleared the regulatory hurdle for uninsured shared equity mortgages last year.
Co-ownership
Buying with a family member, friend or acquaintance is another way to split costs and start building equity. If entered into hastily, it’s also a fast way to ruin a relationship. That is, unless both parties are well-qualified, responsible, have the right expectations and have an iron-clad cohabitation agreement.
Robert McLister: Co-ownership is one way to own a home when you can’t buy solo
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
