Mortgage 101 – Rates, Risks & Real Estate

Clinton Wilkins and Dan Ahlstrand discuss the current state of the mortgage market, focusing on interest rates and home ownership.

Mortgage Rates and Market Trends

Dan Ahlstrand
Welcome back to Mortgage 101. I’m Dan Ahlstrand, in for Todd this month, and he is Clinton Wilkins. With it being back to school and that being our focus this month, Clinton, you’re doing something a little bit unique for this show, and you’re taking it on the road, so to speak, and heading out to the waterfront.

Clinton Wilkins
Our producers and I hit the waterfront here just a couple of weeks ago when we were talking to people and asking them about home ownership. Let me tell you, as soon as people see a camera and they see a mic, they want to talk to you. We kind of joked about doing it at the radio station, but you never know who you might get on. But you guys let a lot of people on there anyway.

Dan Ahlstrand
Well, it’s good to hear from a variety of people, but that’s really, I think, how you get the pulse of what’s going on in the community is taking it to the street and and talking to two people who may be in the market or are back to school and or have all of these questions that we’ve been talking about this edition.

Clinton Wilkins
100% so you know what? I think we’re gonna queue one up and let’s, let’s, let’s find out what our people want to hear.

Question One
What’s happening with rates, Clinton?!

Clinton Wilkins
What is happening with rates? The question, question is really, really wild. I think rates are on a downward trend. Again, we mentioned earlier, I had a call with a senior economist from the Bank of Montreal. We actually did a call for our business partners and our team. We had about 80 people or so sign up for this call. It was amazing just hearing from someone that’s outside of our normal like network, and they’re projecting that the Bank of Canada will lower the key overnight rate by 75 basis points between now and early next year. So that’s cool. Fixed rates have really plateaued. There are some lenders that are offering some quick, low specials. 369, 399, now we haven’t seen a lot of rates in the threes lately. The majority of customers are getting rates in the low fours. But just depending on your situation, it could be better.

Dan Ahlstrand
So, 325’s or a 15-25? How do you think it’s going to roll out?

Clinton Wilkins
25 is my projection again. Let’s see what happens next week. We’ll be reporting live on City News, and we know that station.

Question Two
Why? Why are rates so high?

Clinton Wilkins
Oh, my goodness, these people with the rates. Why are they so high? One was really inflation, right? Tiff Macklin, governor of the Bank of Canada, said the rates were going to stay low for a long, long time. That was incorrect. Inflation became a runaway train, so obviously, the bank can increase the key overnight.

Dan Ahlstrand
So the theory is, and correct me if I’m wrong, the theory with the bank rates rising is that they want to limit access to money so that people aren’t spending as much. The theory works that if you raise interest rates, then fewer people will be spending as much money, and that will lower the inflation rate.

Clinton Wilkins
And it did. It worked. So inflation right now is below 3% which is the target, but if you take out, like, the carbon tax, inflation is probably still above three. That’s where I was on the fence about a cut for this September from the Bank of Canada. But as soon as I saw those job numbers come out, I’m like, we are locked and loaded here with a 25 basis points cut. A lot can change, though, between now and next week. Trump could decide something, and that cuts off the table.

Dan Ahlstrand
What does a 25% drop mean to the average homeowner? Won’t be a 25% but 25 basis points. So like a quarter percent?

Clinton Wilkins
Yeah, it really depends on what your amortization is on what your payment is. Overall, it won’t be a huge dollar amount, but sometimes it’s just those optics. And any savings for consumers right now are great, and really, everyone’s stretched.

Dan Ahlstrand
And if your prediction is correct, and we see a 75 basis point drop, that’s a significant savings in interest for people on particularly on the variable.

Variable vs. Fixed

Clinton Wilkins
Oh, 100% that means that the majority of consumers will have mortgage rates in that 3% range. And we haven’t seen mortgages in the threes. It’s been two years. So I think it’ll be very welcome news for consumers. But on the flip side, for those looking to get into the housing industry, or who have not even housing industry housing market, it is going to increase that demand because I think more people who have been sitting on the sidelines are going to start looking at buying homes. These are great questions. They are great. Hit us with your next one.

Question Three
Variable or fixed?

Dan Ahlstrand
Okay, a lot of rate questions out here, I mean, you’re the expert, obviously, but that would depend on your situation, correct?

Clinton Wilkins
100% depend. And historically, consumers were getting a five-year fix. And that is not the trend right now. I would say the trend is that people are going to variable rates. They know rate cuts are coming. That is just reality. Consumers feel it and they know it, and then the media is talking about it, I would say also a three-year fix, very, very popular. So it’s really between a variable rate mortgage product and a three-year fixed. And I think the consumers who are taking a five-year plan are much more conservative. You want that security, and you’re okay to pay some more. Dan, take a five-year fix. That might not be my advice, but I want to do what’s right for the consumer. So if you tell me I’ve always done a five-year fix, I need to do a five-year fix. I don’t care if I’m going to pay more, I will take the direction from the consumer, but I want to educate them and say, Hey, here’s what’s going on in the marketplace, and here’s why you should do this, and here’s why you should do that, I do believe the variable will be cheaper. Historically, even if you look over the last 50 years, a variable-rate mortgage has been less expensive.

Dan Ahlstrand
Even when we saw those increases correct inflation Clinton, we were talking about rates when those inflation numbers were high and people were renewing their mortgages for one year, for two years, just to be very short. So obviously, you’re back to recommending that they go as long as they can, five years or whatever.

Clinton Wilkins
I would say three years. Very popular variable. Very popular. I would say less popular is the five-year fixed. Although pre-pandemic, about 60% of clients were taking and that’s very historic, that they will take that number for us, a higher percentage of our customers are taking variable because they have me, they know. They have me on City News, they have me on they have me on Facebook, they have emails, and they have SMS, but not every consumer has us. So I think the more conservative, conservative consumers were taking a fixed rate. And you know, the most popular fixed rate would be a five-year. And that’s what

Dan Ahlstrand
People tell me that they are in the mortgage world, that they want to know what their payments gonna be for the next five years so that they can budget around that, right? And that’s what the fixed rate gives you.

Clinton Wilkins
It gives you the budgeting, it gives you security, and it gives you payment certainty. But that doesn’t necessarily mean that that is going to be the best for people, and that doesn’t necessarily mean that it’s going to be the most affordable over that term. Personally, I have a higher tolerance for risk. I’m in a variable. I believe my variable will be cheaper over the long run. Am I paying more today than if I were in the fixe?d Yes, but let me tell you, once we have a 75 basis point, you know, cut, but early next year, I’m gonna be very happy that I was in that variable rate. I can tell you that, and be all in the cash. I’ll be like, Ooh, I’m making some bucks here. Let me get this mortgage paid down. Hit me with your next question!

Real Estate Market

Question Four
Why is my house worth $2 million when I’m just a regular middle-class person?

Clinton Wilkins
You know what? I think that’s a good one too. I actually talked to this one a little bit longer, and I’m like, you tell me about your $2 million home, honey. And she had bought this property. We’re talking like 10, 15, 20 years ago. I can’t remember how long ago, was, but it was a long time since he bought it. She said it was at the top of her affordability, at that time. And she bought it with her spouse, and then the property value doubled, and then the property value doubled again, and she was at the right place at the right time. And she’s like, I’m not a wealthy person, and I would never be able to afford to buy this home again. But she really became a millionaire by buying real estate and holding on to it.

Dan Ahlstrand
It’s like, that’s the dream situation, right? That you buy low and sell high. That’s basic economics.

Clinton Wilkins
She made some good decisions with her money. We talked a little bit more about it, and she doesn’t have a mortgage now, but when she did buy this property, and I think it was over 10 years ago, she paid about $500,000 for it, and now today it’s worth $2 million, but we hear those stories all the time.

Dan Ahlstrand
Just gonna say, you hear that a lot, right? People who have been in the market for a while, who are you buying?

Clinton Wilkins
Places in the South End. You’re buying a place in Bedford. People have doubled, tripled, or quadrupled their property values in the last 20 years.

Dan Ahlstrand
Over the last five years, particularly with all the craziness that was going on during the pandemic.

Down Payment Requirements

Clinton Wilkins
Definitely, I think the people who bought in 2019, even 2020, have pretty much doubled their property values. So doubling in five years is pretty significant. That’s a pretty good return. What’s the next question?

Question Five
How can you have a 1% down home, or 5% and all of that? I believe I’m correct. You need to put the insurance or something like that. It’s the insurance rates are ridiculous.

Clinton Wilkins
That’s a great one. So the minimum down payment in Canada is 5% down. So you know, our person on the street, they definitely knew what they got there at the 5% the cost of insurance is a one-time hit. And the minimum amount for the insurance, if you amortize over 25 years, is 4% so you put down 5% you then have to do 4% insurance on your mortgage. You really have somewhere around 1% equity left in your home. Yes, the cost of insurance may be a lot, but the reason that the Canadian Mortgage and Housing Corporation, CMHC, the reason that these insurers exists is to make home ownership available to more people. High ratio mortgage insurance only started around 1980, so it’s only been about 45 years that people have been able to put down less than 25%. So that’s the number 25% before you’re used to being, now it’s 20% down you need to do to get a conventional mortgage back. Then it used to be about 25% then the high ratio insurance came in because we wanted to make home ownership more available to a wider range. Could you imagine if you’re a first-time home buyer and even have to put down 20% to get into the marketplace? Most people can’t put five. That would be very restrictive. In Nova Scotia, though, we do have a Nova Scotia we have a down payment assistance program, and not every province has this. Obviously, there are some income requirements, and you have to have approval. But if you’re buying something at, you know, middle range of the price point, I think in Halifax, it might be five or 600,000 as the top of the range, you can’t apply for the Nova Scotia down payment assistance program if you’ve never owned a home before.

Dan Ahlstrand
The government kicks in some of that money. Yeah, they give it to you as an interest-free loan. You have to pay it over 10 years. So that gives you a chance to get into them, into these markets that we’ve been talking about throughout this whole episode, about how expensive it is for a first-time buyer to get in.

Clinton Wilkins
So if you have good income and you have good credit, but you don’t have the down payment, maybe the down payment assistance program could work for you. We have a couple of minutes left, so I think we might have time for one more question.

Question Six
Like to know what can happen in the case of an inevitable crash. Let’s be honest, condos are dropping. Homes are dropping. What’s going to happen when houses actually collapse?

Clinton Wilkins
This sounds like a student coming from Ontario, right? What do you think?

Dan Ahlstrand
Tough question because it is happening out west, but it’s, as we said earlier, it’s not happening here, at least not yet.

Clinton Wilkins
It certainly hasn’t happened here, and we’ve actually had price growth where Ontario, you know, in some areas, it’s been like 25%.

Dan Ahlstrand
I can’t imagine being in a property, if it’s a condo or whatever, and then all of a sudden, the market drops 25% that would be frightening.

Clinton Wilkins
It’s alarming. And you know what? Sometimes you just have to ride it out. You know, there’s no magic solution here. But if you do have high ratio insurance and you’re having financial challenges, we’ll say the insurer is going to try to work with you to keep you in that property. If you have a true conventional mortgage, like you’re putting down 20% or more, it’s really between you and the bank. You’re sorting this out, but sometimes you just have to hold on. You might have to rent it, you might have to sell it and take a loss, but you know, the worst-case scenario is the bank is going to take this back from you, and nobody wants that, right? I don’t want that. The consumer doesn’t want this. The lender doesn’t want this. But I can tell you, there are probably some people in Toronto who are giving their condos back to the bank. I think that’s going to happen, and I think it has happened, but we haven’t had the losses here that the Canadian Bankers Association thought we were going to have. People are paying their mortgages on time.

Dan Ahlstrand
Which we thought was going to be a big problem after the pandemic, when those mortgages were so inflated and then we thought, once the renewals come in, and we’re in fire and that people weren’t going to be able to afford their mortgage payment.

Clinton Wilkins
It hasn’t happened. Canadians are very resilient people, and they’re going to pay their mortgage payment probably before they’re paying their credit card or their line of credit. And you know, anybody, even with damaged credit, they’re getting a car loan.

Dan Ahlstrand
We’re going to take our next break here on Mortgage 101. He’s Clinton Wilkins. I’m Dan Ahlstrand. We’re back in minutes.