Are your mortgage payments becoming unaffordable?

Are your mortgage payments becoming on affordable?

In the past year and a half the prime rate in Canada has gone up by 3.5%.​ depending on the size of your mortgage and whether you are in a fixed or variable rate mortgage, this has translated to increases in monthly payments of hundreds and sometimes thousands of dollars. For many Canadians, this has made their mortgage unaffordable.

This problem for mortgagors and homeowners across Canada has also been compounded by depreciating home values. Why is this an issue for homeowners? The amount that you can refinance a home decreases as house prices decline. This is why if you are thinking of refinancing your home, it is better to do so sooner than later so that you can secure the funds prior to the house values declining. For example, if you were thinking about getting a Home equity line of credit [HELOC], then if you secure it now will home prices are higher, the limit will not change as the value of your home declines.

Home equity line of credit [HELOC], then if you secure it now well home prices are higher, the limit will not change as the value of your home declines.

Are declining prices good for potential homebuyers?

The short answer is: yes. However, if you are trying to qualify for the maximum mortgage amount to afford the purchase of that home, the amount that you are able to qualify for is declining due to increasing mortgage rates. As mortgage rates increase, the amount that you can qualify for decreases. So the decline in house prices are being offset by the increased mortgage rates. 

This is why it is useful to have a preapproval in place prior to the mortgage rates increasing and the house prices decreasing. The reason is that the preapproval rate will dictate the amount that you can qualify for and that will remain constant in the environment of increasing rates and decreasing house prices. This translates to you being able to afford more but only if you purchase prior to the preapproval expiry. 

Generally speaking, preapprovals are held valid for a period of 120 days. So if house prices fall within that. And you were able to close within 120 days, you might be able to benefit as a home buyer.

What if you own a home currently and you were not able to afford the mortgage payments?

What if you own a home currently and you’re not able to afford the mortgage payments?

There are a few options in this case:

• Refinance
• Increase the amortization period to reduce the payments
• Switch to a different lender with a better rate
• Switch to a variable rate mortgage with fixed monthly payments
• Get a home equity line of credit (HELOC)
• Get a second mortgage
• Switch to a mortgage with no payments (deferred)
• Switch to a mortgage with interest only payments
• Sell the home

Some of these options are better than others but they are all possibilities and I would recommend one or more depending on the circumstances.