2023 could be an ugly year for homeowners caught between higher rates, falling prices

Mortgage brokers say 2023 could be an ugly year for some homeowners, who have become mired in the monetary vice grip of rapidly rising interest rates and continually falling home prices. 

It follows years of frenetic activity in a red-hot real estate market that saw the price of an average London home peak in February 2022 at $810,000. Prices have fallen every month since to rest at $612,770 last month, a December that saw only 299 sales, the lowest number recorded for the month in a decade. 

At the same time, interest rates have risen steadily, from 0.25 per cent in March to 4.25 per cent last month, forcing prospective buyers to put off home ownership, or, squeezing those who already own, compelling households with variable-rate mortgages to divert money from their discretionary spending into larger mortgage payments. 

"A lot of people are upset with the idea it went up so drastically," Mike Hattim, a London, Ont., mortgage broker with Dominion Lending Centres said of the seven rate hikes by the Bank of Canada since March 2022. 

'If you currently got a variable rate, what do you do?'

"The challenge is, if you currently got a variable rate, what do you do? Do you switch to a fixed one? Do you ride it out? These are the common questions people have right now," he said.

Hattim said the answer is sometimes simple, sometimes complicated and never one-size-fits-all because it considers a borrower's income, spending and comfort level regarding debt and the current state of market instability.

"There is a psychological aspect to it along with the affordability," he said. "We are in an unprecedented time. We've never dealt with a pandemic that's had this kind of an impact on rates."

Add to that inflation, which on most goods clocked in at 6.8 per cent in November 2022 and some household budgets have stretched beyond their breaking point. The Office of the Superintendent of Bankruptcy reported 3,475 bankruptcies in Ontario last November, a rate almost 23 per cent higher than the year before. 

Those numbers might only get worse, as the Toronto Star reported on Tuesday, the CEOs of Canada's big banks predict "tens of thousands" of Canadian homeowners could be at risk of defaulting on their mortgages as rates continue to move higher. 

Some brokers predict rates coming down again in 2024

Still, it's not all bad, according to Jasmine Srnicek, a mortgage agent with Brix Mortgages in London, who said some home buyers have taken advantage of the cooling market to finally make their move into the realm of home ownership. 

"I've actually seen a few first-time home buyers come across my desk," she said. "I think although rates are definitely higher than in the past, there is an opportunity for some folks who have been sitting on the sidelines and have not been able to compete for the last couple of years."

Srnicek said it's still possible to get a fixed rate mortgage at five per cent, depending on the lender, and home buyers now can set conditions for the sale of a home.

She said for those who bought at the market's peak and are struggling under the weight of higher mortgage payments, there's always the option to refinance, as long as it makes sense for a homeowner's finances. 

"There are still options in terms of potentially refinancing up to a 30-year or 35-year amortization with an alternative lender if that could decrease some of the stress you have with those increased payments.

"Although it's not an ideal situation, there are some ways to make the next few years manageable while we wait for those rates to come down." 

Srnicek said most brokers predict interest rates will continue to rise in the first quarter of 2023, with the first Bank of Canada announcement on the key interest rate set for Jan. 23.

She said she expects the key interest rate to start coming down again just ahead of 2024. 

Srnicek said anyone having problems covering the bills should contact their mortgage professional because there are always options that can be worked out. 

"I certainly don't love hearing folks are losing sleep, and I think there are still options for people."