The current interest rate climate for mortgage brokers and their clients is dramatically different compared to just a year ago, requiring a whole new strategy when it comes to renewals.
The market has never experienced such a dramatic rise in the overnight rate over such a short period of time. As a result, brokers are being challenged to find solutions for variable-rate clients who now have rates much higher than a year ago, and fixed-rate borrowers facing sharply higher renewal rates.
All of this requires a dramatically different approach, says Ron Butler of Butler Mortgage Inc.
“We went years where the only discussion that we had with people was a question of 5-year fixed or 5-year variable — that was probably 80% of the whole discussion over the last 10 years,” Butler told CMT. “Now we’re in a world we haven’t seen for a decade or more; it’s a very unusual place.”
Butler explains that the sudden rise in the Bank of Canada’s overnight target rate—from 0.25% in early 2022 to 4.5% less than a year later—challenges much of the conventional wisdom about the mortgage business, and the advice offered to clients at renewal.
The end of the 5-year standard?
One of the biggest changes seen in recent months is a transition away from the 5-year term as the default option.
“Trying to talk to people about shorter terms in the past it was like trying to convince people to eat their vegetables, they just didn’t even want to have the conversation,” said Rob Campbell of Premiere Mortgage Centre. “Now the clients seem to be leading that charge.”
Campbell explains that in this high interest rate environment—and given the Bank of Canada’s pause on interest rate hikes—many expect rates to drop from their current position, but when and how quickly remains unknown.
“All things point to the potential for rates to come down ever so slightly over the next couple of years, and if you want to take that gamble, a two- or three-year term might be worth investigating,” he said.
Time to take variable off the table?
Whether you’re confident in a rate drop over the next two or three years or not, both Butler and Campbell strongly recommend against choosing a variable rate. That’s because variable-rate mortgages are uncharacteristically higher in comparison to fixed rates—even on a 2- or 3-year term—while penalties for breaking either term are relatively similar.
“I just don’t know that variable is a good conversation anytime soon; maybe when inflation seems to be dead and the Bank of Canada starts its march down,” says Campbell.
Butler, meanwhile, puts it more bluntly. “My opinion is that we shouldn’t sell anyone variable right now,” he said. “We shouldn’t be making wagers on the future variable, but we should try to get the client the best kind of short-term rate we can get.”
Is it worth switching lenders?
One of the ways Canadians are managing the elevated rate environment is through transferring to a new lender, according to Clinton Wilkins of the Clinton Wilkins Mortgage Team with Centum Home Lenders. He says clients are becoming more savvy, and banks are acting less aggressively, causing many to look elsewhere.
“I’m seeing more clients at renewal, even coming out of the big five, and wanting to do a transfer instead of a renewal with their existing lender,” he said. “I think transfers are becoming more popular, especially if they are insurable, which means they will get a lower rate typically than what their existing lender offers.”
One thing to keep in mind with a transfer at renewal is the need to re-qualify under the mortgage stress test, which means qualifying at the higher of 5.25% or two percentage points above their contract rate.
Wilkins, who is based in Halifax, also found that many outside of the country’s biggest real estate markets are leveraging the existing equity in their homes to help manage rate increases at renewal.
“In our market here in Atlantic Canada, and in the Prairies as well, there are lots of clients that have quite a bit of equity in their property, so at renewal some clients are looking to do a type of product like a TD FlexLine, Manulife One or Scotia STEP so they can leverage the equity,” he said. “We’re definitely seeing more requests for those kinds of products than we were before.”
Time to shore up relationships with clients
The last few years have been somewhat of a feeding frenzy for mortgage brokers, but now that things have slowed down, some are looking forward to getting back to the thing that attracted them to the industry in the first place: client relationships.
“It’s a shift from the past few years, where brokers have been highly transactional because business has been so plentiful,” says Frances Hinojosa, CEO, co-founder and mortgage broker for Tribe Financial Group. “The focus should be on building relationships and coming from a place of service.”
Hinojosa explains that in the booming market of the recent past, brokers may have lost sight of the value they provide clients beyond simply selling them a mortgage, adding that now is the time to return to that approach.
Specifically, she recommends sitting down with clients at renewal and having an honest conversation about cash flow—including their current cash flow situation, anticipated changes to their income or expenses, and their long-term goals.
“This is an opportunity to engage in conversation with clients to see if you can find ways to restructure their financial profile in order to give them better cash flow results,” she said. “Clients are craving advice, and that’s the thing brokers do best.”