Navigating interest rate fluctuations has become a new challenge for Ontario mortgage brokers as they adapt to fluctuating numbers due to inflation. The Bank of Canada has forecasted that inflation will reach the target rate of 2% sometime in 2024.
Until that happens and the rates begin to reverse, mortgage brokers must understand how these trends influence borrowing, what long-term effects are likely, and what strategies they can use. Understanding the current climate and where the rates are going can help them adjust their lending strategies and provide appropriate guidance to clients in volatile markets.
The recent round of interest rate hikes by the Bank of Canada has meant that mortgage brokers need to shift their approach to the business they're in. Many would-be buyers moved to the sidelines due to the spike in borrowing costs that have essentially cancelled the declines in home prices as the rates climbed.
How are Interest Rate Changes Impacting Mortgage Lending in Ontario?
Consider the numbers. In 2022 alone, the Bank of Canada raised their rate by 400 basis points. Last year, borrowers faced three more quarter-point hikes. According to the Bank of Canada estimates, 40% of those holding mortgages have renewed at a higher rate.
There's an expectation that rate cuts are coming in the future, and the Canadian Real Estate Association (CREA) predicts a rebound in sales (+9% Year over Year in 2024).
These fluctuations mean that mortgage brokers must adjust to the changing rates. Changing lending tactics is just one maneuver. Brokers will also need to guide Borrowers through these volatile markets.
These interest rate changes have changed the mortgage lending landscape permanently. Phil Soper, President and CEO of Royal LePage, recently summed them up by saying rate cuts will only be modest in 2024.
That, in turn, will lead to what he calls a significant adjustment to mid-single-digit borrowing costs.
What Strategies Can Mortgage Brokers Employ to Navigate Fluctuating Interest Rates?
Mortgage brokers can adopt a few policies and strategies to smooth over the effects of fluctuating interest rates. Keeping an eye on current trends is essential to making the right decisions for their businesses and clients.
Explore Prepayment Options
Supplying clients with low mortgage rates is critical. However, a mortgage broker should encourage them to consider their prepayment options, to underscore their flexibility to make extra payments.
This is how brokers can focus on client relationships and build strong bonds with their customers. This is one way that brokers can foster a trusting relationship between them and a client that fosters business in the long run.
Highlight Rate Holds
It's also suitable for mortgage brokers dealing with fluctuating interest rates to offer rate holds that attract business in uncertain times. This is an excellent incentive for people to sign up before their mortgage renewal date. However, they need to be prudent when offering these types of products to ensure the numbers they come up with are viable in a business sense.
Depending on the circumstances, mortgage brokers may recommend a fixed or variable rate. Historically, variable interest rates have been the cheaper option in times of economic stability. A fixed-rate acts as a sort of hedge against short-term interest rate increases. Generally, brokers will recommend fixed rates for people who can't handle the shock of increased mortgage payments.
How Do Interest Rate Trends Influence Borrowing and Lending? Behaviors?
There are several ways rates have an effect on borrowers and lenders. Generally, these interest rate trends are caught between controlling inflation and stimulating economic growth.
Some expectations are that a premature rate cut by the Bank of Canada will cause another bump in Canadian housing markets, causing further inflation.
The impact of the current policy rates will continue to have an effect on the Canadian economy in 2024. There are other predictions about how these trends will affect borrowing and lending behaviours in the short and long term.
Predictions are there will be a decrease in demand for goods and services, so inflation should decrease to 1% to 3% later this year. Even though some experts have predicted the policy rate to reach 4.25% by the end of 2024, other factors, including lower job vacancies and increased unemployment can hurt borrowing and lending.
What Long-Term Effects Could Interest Rate Changes Have on the Mortgage Industry?
Some of the long-term effects on the mortgage industry include a shock that's set to hit borrowers. This, in turn, will impact mortgage brokers and how they conduct their business on the rates they charge.
For example, the Bank of Canada reports that borrowers who took out their mortgages in 2021 when interest rates were at historic lows will experience large increases by the end of 2026. That also applies to people who have opted for variable mortgage rates. That cycle began in March 2022 with rising interest rates.
Some of the possible consequences include increasing default rates, especially for borrowers who took out variable-rate mortgages.
- There's also the possibility of fixed interest rate changes impacting mortgages if monthly payments become unaffordable.
- Stricter lender criteria, including higher income requirements and larger down payments, might be on the horizon.
- There may be a shift away from variable rate mortgages towards the fixed-rate variety so that borrowers can lock in rates.
Finally, a bump in the number of defaults could lead to a bump in foreclosures and put downward pressure on home prices.
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