There is no shortage of public opinions about the direction of the Canadian economy. Sadly, there’s also no clear consensus!
Even within the Canadian economy, there is a substantial discrepancy between the housing markets across the country. While most local economies are seeing stable growth, some markets have become exceedingly expensive, but some markets are coming crashing down, like the Toronto condo market.
One thing is certain - in the next year every homeowner will have now had to renew their mortgage at a higher rate than their previous term.
It was in January of 2022 that interest rates started rising from historic lows during the pandemic. Since the maximum renewal term for a mortgage is five years, by January 2027, everyone will have lost the benefit of the low interest rates that held through the early years of the pandemic.
What does this mean for the average consumer?
This means that amidst rising everyday costs, the largest line item on any household budget – housing – is due to increase. So what can you do? A few options are available.
- Try to offset the increase in your mortgage by reducing or optimizing other expenses. Cut out that cup of coffee, entertain friends at home instead of going out to restaurants, have a Netflix date night instead of going to the movies - do anything to cut expenses.
- See if your bank will extend your amortization term. The banks have become able to stretch the full term for repayment in full, often by an extra five years. While this will cost you more in interest over the life of your mortgage, it will allow for more manageable monthly payments where the bank allows.
- Reduce unsecured debt. If you are carrying a heavy unsecured debt (any loan or credit agreement where you do not pledge any property as collateral) that is weighing heavily on your monthly budget, look to see if you can add it to your mortgage. While your mortgage payment will go up, your total monthly expenditure will decrease because you are turning credit card or unsecured line of credit interest rates into a mortgage interest rate, which is always much lower.
- Consider a Consumer Proposal. If you are only paying your minimums and unable to manage to reduce your unsecured debt, it may be time to speak with an LIT. A consumer proposal may negatively impact your credit, but it may be your lifeline to reducing monthly minimum payments and getting out from under an unmanageable debt burden in five years.
- Evaluate downsizing - carefully. Before there is a negative change in market values, ask yourself if now is the time to “cash out” and look for something with a smaller financial footprint. With uncertainty on the horizon, it may be time to get maximum value for your real-estate and minimize your housing expenses. When downsizing, you are not just saving on a mortgage payment but usually also property taxes, insurance, utilities, maintenance and incidentals.
It’s important to note that some markets have already seen significant decreases in real estate values. Before making an offer on something smaller, make sure you can still sell for above the amount owing on the existing mortgage. If not, selling could end up costing much more than you expect. Most importantly, do your research! Talk to professionals, rate shop, see what different options are out there.
It is also important to recognize that housing and rental markets vary significantly across Canada. In some regions, home prices may be softening, while in others, limited supply continues to support higher prices. Similarly, while rental rates have moderated in certain markets, affordability and availability can still be a challenge. Before making decisions such as downsizing or moving to a rental property, individuals should carefully consider the conditions in their local market, including transaction costs, rental availability, and long-term affordability.
If you feel like no matter what 1 + 1 is no longer equalling 2, you can also speak with a Licensed Insolvency Trustee. They are there to help you understand your options and make the best choice for managing your budget.