Mortgage Basics

Strategies Canadian Homebuyers Are Using to Enter the Housing Market

Strategies Canadian Homebuyers Are Using to Enter the Housing Market

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    Faced with higher interest rates and a higher cost of living, many buyers in Canada still jumped at the chance of snagging a home in 2023 as home prices cooled and the market shifted to balanced and buyer’s markets. 

    CMHC recently released their 2024 Mortgage Consumer Survey, which surveyed 3,866 Canadians who were mortgage consumers in the last 18 months. This survey sheds light on the state of the housing market in Canada and how buyers are strategizing to become homeowners. 


    Key Takeaways

    • Canadian homebuyers are showing resilience and adapting to high interest rates, and they are getting creative to achieve homeownership. 
    • As prices remain high, many Canadians are turning to non-traditional home purchase methods, marking a significant shift in homebuying behaviours. 
    • The rise of digital platforms has given homebuyers alternatives to traditional methods for finding their perfect home and funding a mortgage.

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    Market Trends and Buyer Behaviours

    In the past 18 months, the number of mortgage consumers who were buying decreased, with 10% of homebuyers being first-time buyers and 8% being repeat buyers. Approximately half of all buyers paid the maximum amount they could afford, with almost a third saying they paid more than planned. 

    This is the first year since 2019 that almost half of all consumers chose a broker as much as a lender for their mortgage. 48% of those surveyed went with a mortgage broker, while 47% went with a lender. First-time buyers, refinancers, newcomers, and Ontario and B.C. residents more often chose a mortgage broker. Renewers, those 45+ and residents of Quebec, were most likely to work directly with a lender. 

    Fixed-rate mortgages are still the most popular option, with 69% choosing fixed, 23% choosing variable, and 5% choosing a combination of fixed and variable. However, the popular 5-year fixed term is slowly losing its edge as more Canadians opt to renew for 3 years or less. 

    Impact of Interest Rates on Homebuying

    Interest rates significantly affect home affordability and a homebuyer’s budget. Higher interest rates reduce buying power, meaning you qualify for less home when interest rates are higher. This highlights the importance of shopping around for the best mortgage rates. 

    Shopping around can save you considerable interest-carrying costs, especially during your first term, when you pay more interest than principal with your mortgage payments. Even a small difference in the interest rate can equal big savings over your mortgage term. Additionally, securing a lower interest rate can reduce your monthly mortgage payments, lower your debt service ratios and help you qualify for more home. 

    The table below illustrates the cost savings of choosing a slightly lower rate on your monthly mortgage payments and the amount of interest you pay. Selecting the lower rate lowers your monthly payments by approximately $111 and saves you roughly $9,372 in interest over a 5-year term on a $650,000 mortgage with a 25-year amortization.

    Interest Rate 4.84% 5.14%
    Monthly Mortgage Payments $3,721.45 $3,832.40
    Total Term Interest Paid $147,128.59 $156,500.82
    Total Term Principal Paid $76,158.24 $73,443.30
    Total Savings (Interest) $9,372.23

    The table below illustrates the impact on affordability based on the interest rate you are offered, assuming you make a 20% downpayment and choose a 25-year amortization. With a higher interest rate, you qualify for $23,439 less, and if you wanted to purchase the same house, you would need to increase your downpayment by that amount. You could also extend the amortization to 30 years, but this would come at the cost of paying more interest over the life of the mortgage. 

    Interest Rate 4.84% 5.14%
    Maximum Purchase Price $812,500 $789,061
    20% Downpayment  $162,500 $157,812
    Maximum Mortgage $650,000 $631,249
    Difference in Purchasing Power $23,439

    Strategies to Navigate Higher Interest Rates

    There are a few strategies you can use to navigate high interest rates, including:

    Create a Financial Plan

    Whether you’re a first-time or seasoned buyer, creating a budget can help you understand how your money is allocated each month, helping you stay on track with spending and savings. Having a budget can also help you determine areas of discretionary spending that you could cut back if necessary to help you withstand higher interest rates. 

    Building an emergency fund can help you plan for the future. Having an emergency fund readily available can help you weather any changes to your financial situation by giving you a buffer to fall back on. 

    Additionally, having a financial plan and making timely bill payments will help you improve your credit score. A higher credit score can help you secure the best interest rates, which will help you save money on interest over the life of your mortgage. 

    Choose the Best Mortgage Type

    A fixed-rate mortgage locks in the interest rate for a set amount of time, offering stability in mortgage payments. If interest rates increase during your term, your rate will remain stable. This helps you budget for this significant expense. 

    A variable-rate mortgage may also be a suitable option if its anticipated interest rates fall over your term, helping you realize immediate savings on the interest-carrying costs. However, this comes with some risks, especially if your budget doesn’t have much wiggle room for fluctuations in your fixed expenses. 

    If interest rates increase, your payments will immediately increase if you have an adjustable-rate mortgage (ARM), or more of your payment will go to interest and less to principal if you have a variable-rate mortgage (VRM), putting you at risk of negative amortization.  

    Refinance

    If you are already a homeowner, refinancing into a lower interest rate can help you realize immediate cost savings on the interest portion of your mortgage payments. With this option, it’s important to compare the cost to break your current mortgage term, understand any potential fees, and compare those to the potential savings to ensure you are coming out ahead. 

    If you recently had to renew at a higher interest rate or are up for renewal soon, a refinance to extend your amortization could help lower your mortgage payments. While this option will help you reduce your mortgage payments now, it will come at the cost of more interest paid over the life of your mortgage. 

    How Homebuyers are Saving to Afford Homes

    Home affordability continues to be an issue for many Canadians. While the minimum downpayment is 5%, many prospective homeowners must put down much more than that to afford the average-priced home. This is especially true in hot markets like Toronto and Vancouver, where home prices regularly exceed $1 million, requiring a 20% or more downpayment.  

    21% of first-time buyers say it took them more than 6 years to save enough of a downpayment to purchase a home. They’re also more likely to put down less than 20%. 

    To afford a higher downpayment, more and more Canadians are turning to family to help fund their downpayments. According to CMHC’s survey, 38% of buyers received gifts to help with their downpayment, with the average amounting to $77,487. 

    Nearly a third of those who received gifts to fund their downpayment said they wouldn’t have been able to purchase without the help. 

    The survey also shows that many buyers are not fully taking advantage of the tax-free accounts offered to save for their downpayments. Only 31% of first-time buyers used Registered Retirement Savings Plan (RRSP) funds under the Home Buyers’ Plan (HBP). Of the 71% surveyed who said they were aware of the First Home Savings Account (FHSA), only 33% utilized the program. 

    These findings could suggest that first-time buyers simply don’t have the additional funds to put towards savings to take full advantage of the tax advantages of these accounts. 

    Creative Homebuying: The Rise of Joint Purchases

    Non-traditional homeownership models are gaining traction, offering creative solutions for prospective buyers facing high property prices and interest rates. If you’ve considered purchasing a home with your friends or a family member, you’re not alone. 

    A recent Re/Max Canada survey shows this emerging trend is becoming more mainstream. 13% of those surveyed said they purchased in a non-traditional way. An additional 32% of Canadians are currently exploring non-traditional ways to enter the housing market, with a staggering 48% saying they would consider this form of homeownership in the future. 

    Of those considering purchasing in a nontraditional way, 22% would choose rent-to-own programs, 21% would consider co-owning with family that isn’t a spouse or partner, and 17% would consider purchasing a home to live in with additional space that they could rent out to someone else. 

    The Role of Technology in Shopping for a Home

    Technology plays a big part in our everyday lives, from work to leisure, so it’s no surprise that it is also shaping how prospective buyers search for a home and get a mortgage. Technology in the real estate industry has revolutionized how people search for properties and obtain financing. Prospective buyers can now browse numerous online listings, view virtual home tours, and even apply for a mortgage through digital platforms like nesto

    Of those surveyed, 50% said they are comfortable completing the entire homebuying process online. Meanwhile, 62% were comfortable sharing mortgage information virtually. 

    This has made the homebuying process more convenient and expanded the options available to buyers, allowing them to explore a wider range of properties and financing options. This trend underscores the importance of digital platforms in the homebuying process.  

    Frequently Asked Questions

    How is the housing market in Canada expected to change by 2025?

    Interest rates are projected to begin decreasing gradually in 2024. By 2025, home prices and sales in Canada will likely increase due to many potential buyers sitting on the sidelines, waiting for either interest rates or prices to decrease.

    What are the long-term predictions for Canada’s housing market?

    Over the next few years, the demand for homes is expected to drive up sales and prices across Canada as the imbalance between supply and demand becomes an increasing challenge. By 2025, housing prices could exceed peak levels, further increasing concerns about housing affordability.

    Is there a real estate bubble in Canada?

    Canada’s housing market has experienced significant growth, particularly following interest rate cuts during the 2020 pandemic. Canada could be considered in a housing bubble, as demand, not the economy, is driving prices higher. However, don’t expect this real estate bubble to burst, as rules like the stress test mean there is less of a chance a buyer in Canada would default on their mortgage when interest rates rise.

    Final Thoughts

    Economic and technological advancements significantly shape buyer behaviours and market trends. The varied impact of interest rates across regions, coupled with generational shifts in how buyers get into homeownership, underscores the dynamic nature of the market. 

    The emergence of non-traditional homeownership models and the pivotal role of technology offer new and creative solutions for current and prospective buyers. These trends illustrate a market that is evolving and adapting to modern demands. 

    nesto’s digital platform streamlines the mortgage application process from start to finish and provides a comprehensive overview of your financing options from the comfort of your home. Get in touch with a mortgage expert today to find your most suitable mortgage strategy. 

    How nesto works

    At nesto, all of our commission-free mortgage experts hold concurrent professional designations from one or more provinces. Our clients will receive the best advice and care when they speak with specialists that exceed the industry status quo. 

    Unlike the industry norm, our agents are not commissioned but salaried employees. This means you’ll get free, unbiased advice on the most suitable mortgage solution for your unique needs. Our advisors are measured on the satisfaction and quality of advice they provide to their clients. 

    nesto is working hard to change how the mortgage industry functions. We start with honest and transparent advice, followed by our best rates upfront. We can offer you these low rates using the fintech industry’s best-in-class and safest technology to provide a 100% digital online experience and process to reduce overhead costs.

    By working remotely across Canada, all our mortgage experts and staff spend less time commuting to work and more time with their friends and family. This makes for more dedicated employees and contributes to our success with happy and satisfied clients.

    nesto is on a mission to offer a positive, empowering and transparent property financing experience, simplified from start to finish.

    Reach out to our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.


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