When sinking property values raise red flags for borrowers
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Robert McLister: Canadians' options for renewing or refinancing may be limited due to falling valuesYou can save this article by registering for free here. Or sign-in if you have an account.Falling real estate prices are rarely fun for anyone, except maybe bargain-hunters.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.On the mortgage front, the frantic price escalation of 2021 and 2022 stands ready to deliver a delayed reckoning for certain borrowers come next year.Specifically, their options for renewing or refinancing may be limited due to falling values.Below, I’ll lay out the mechanics, then explain why it matters.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.Property values directly influence both the equity you’ve accumulated and the menu of mortgage options you have available.Home values vary widely by region, but to illustrate, imagine you’re the “average” Canadian who bought the average-priced home at the average fixed mortgage rate in 2021, 2022 or 2023.Here are examples of how equity levels can shift in unexpected ways:The point is, there’s a good chance we’ll see more people in 2026 and 2027 who need mortgage relief but discover their loan-to-value ratio has boxed them into fewer choices than they’d hoped.Quick tip: To get a rough idea of your equity, check your local real estate board’s average price change for similar homes in your area since the time of your purchase. Apply that value change to your property and then compare it to your mortgage balance. You can also use an online auto-valuation tool or consult a realtor or a mortgage broker.First off, if you have a mortgage that’s more than 80 per cent of your property value, it means two things:For one, refinancing is generally off the table — at least not at low prime interest rates. A standard refinance needs 20 per cent equity or more.You might be able to find a small unsecured line of credit or borrow against other assets. Or maybe you’ll find a private lender to give you a second mortgage up to 85 per cent of your property value, but you’ll pay double-digit interest rates for this higher-risk financing. And if you own a condo in a weak market, forget about that altogether.Secondly, a loan-to-value over 80 per cent also rules out switching lenders — if your mortgage is uninsured. That’s because mainstream lenders require default insurance for such “high-ratio” mortgages.As a result, the uninsured high-LTV borrower is stuck with whatever rate and terms their existing lender is charitable enough to offer — unless they can find cash elsewhere to pay down the mortgage to 80 per cent of the property value.And guess what? Lenders aren’t naïve. They know roughly how much equity you have because they routinely monitor the property values of loans in their portfolios.That means they also know when your options are sparse. So don’t be shocked if their renewal offer looks less charming after your home value sinks.Prospects improve markedly for those with insured mortgages seeking to change lenders. As long as you otherwise qualify, you’ll find lenders who don’t care if you have a high (90-per-cent range) loan-to-value, since the insurer is taking the risk if you don’t pay.Two side notes:And one last point on insured mortgages: insured rates are the lowest in the country, often 25 basis points or more below uninsured rates. The switch flexibility and rate savings arguably make it worth paying the insurance premium in frothy markets, as we saw three to four years ago — assuming you plan to stay in your home for ten-plus years.Diving real estate values play havoc with mortgage options, and people living at ground zero (Toronto and Vancouver) could feel it most next year.And, as we speak, preliminary data from digital realty firm Wahi show median GTA home prices slipping another 0.7 per cent in the first half of December. That would be a 6.2 per cent year-over-year drop if it holds.Insured borrowers who bought with a small down payment, and uninsured borrowers who’ve seen big value drops since their financing, should speak with an experienced mortgage advisor early — ideally not the week before renewal — to map options.Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.For the best national insured and uninsured mortgage rates, updated daily, please visit our mortgage rate page here.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.