housing market

With the cost of borrowing on the rise, cottage owners might wonder if now is the right time to switch from a fixed-rate mortgage to a variable-rate one—or continue to weather the storm until borrowing rates begin to cool.

After cutting interest rates to near-zero levels at the start of the pandemic to encourage spending, Canada’s central bank has hiked interest rates five times this year to tame soaring inflation, which has risen to its highest level in decades.

On September 7, the Bank of Canada raised its key interest rate to 3.25 per cent, triggering higher borrowing rates for homeowners who are up for renewal on their fixed-rate mortgages or ones with variable-rate mortgages. In an environment of rising rates, more of your payment goes towards interest, which means it will take you longer to pay down your mortgage. (For example, as of writing, borrowers with TD Bank can expect to pay 5.24 per cent on a five-year fixed mortgage or 5.15 per cent on a five-year variable mortgage.)

Andrew Thake, a mortgage broker based in Ottawa, cautions cottage owners against getting swept up in the panic of rising rates. First and foremost, Thake says anyone with a variable-rate mortgage on a cottage should call their mortgage broker, not their bank. “A broker can give them a broader scope of the options available at their lender and dozens of other lenders.”

Thake says some lenders may fix the payment on the variable interest rate mortgage. “There are a select group of lenders where if rates go up and down, your payment stays the same,” he says. “And then within that payment, the mix of principle and interest changes.”

According to Thake, cottage owners can jump ship to a fixed rate for peace of mind, but it comes with risks. “If we look at charts of variable interest rates over the last 10, 20, 30 years, those who have gone with a variable rate tend to have done better than those who have gone with a fixed rate,” says Thake.

The data backs this up. Canada Mortgage and Housing Corporation found that homeowners with variable-rate mortgages had paid an average interest rate of 4.14 per cent in the past 25 years, which is lower than the average 5.30 per cent fixed-rate holders paid over the same period.

There’s no penalty associated with switching from a variable to a fixed rate on your mortgage. “But if you ever want to switch from a fixed to a variable rate, you can’t do that without a penalty,” says Thake. “Plus, the penalties on fixed rates are typically quite large when we compare them to penalties on other types of mortgages.”

Thake says whatever decision you make, it’s important to make it with a long-term view in mind. “If you start to time the real estate market, it would be like timing the stock market, and most people don’t fare too well with that kind of stuff.”

The Royal Bank of Canada is forecasting a “historic correction” to Canada’s real estate market after two frenzied years of buying, and cottage country will feel the impact.

In its latest housing report, RBC assistant chief economist Robert Hogue says that the bank expects home sales to fall 23 per cent this year and 15 per cent next year, eventually culminating in a 42 per cent drop from the start of 2021. That’s a larger decline than any of the past four national downturns (-33 per cent in 1981–1982, -33 per cent in 1989–1990, -38 per cent in 2008–2009, and -20 per cent in 2016–2018). Along with the drop in sales, the national benchmark price will fall 12 per cent by the second quarter of 2023.

The drop in sales and prices is a result of rising inflation caused by COVID-19 and Russia’s invasion of Ukraine. In May, Canada’s inflation rate reached 7.7 per cent, the largest yearly increase in almost four decades.

To combat rising inflation, the Bank of Canada is raising interest rates, making it more expensive to take out loans, such as mortgages. In July, the Bank of Canada raised its interest rate an entire percentage point to 2.5 per cent. In the RBC report, Hogue says he expects the interest rate to continue rising, reaching 3.25 per cent by October.

Ontario and B.C.’s real estate markets are expected to be hit the hardest, specifically high-priced areas sensitive to interest rates, such as Toronto, Vancouver, and Victoria. Over the next year, RBC predicts that property sales in Ontario and B.C. will fall 38 per cent and 45 per cent respectively, with prices dropping 14 per cent.

The average property price in Ontario has already fallen 7.6 per cent this year, and 4.9 per cent in B.C.

Within these markets, some of the first properties impacted will be cottages. “With consumer spend, what we expect is the consumers to stop purchasing things that are discretionary and keep buying the necessities. That same logic applies to the housing market. If [people] don’t need a cottage, this is probably not really the best time to go out and look for one,” says Claire Fan, an RBC economist.

Out of Canada’s cottage country areas, it’s the markets around Toronto and Vancouver that will experience the greatest changes, Fan says.

“Those markets saw the most uprising in both prices and retail volumes over the course of the pandemic because people were looking for more space,” she says. “But a lot of these markets that saw the biggest price appreciation over the course of the pandemic are the ones that are getting hit the hardest at the moment because larger prices come with pricier mortgages, and those are the most interest-rate sensitive.”

Areas farther away from high-priced urban centres should remain more stable. And Canada’s other provinces won’t be hit as hard as Ontario and B.C. “We project prices to slip less than 3 per cent in Alberta and Saskatchewan, and between 5 per cent and 8 per cent in the majority of other provinces by the first half of 2023,” Hogue says in the report.

While none of this is great news for home or cottage buyers, RBC does expect the real estate market correction to end sometime in the first half of 2023. “We’d argue the unfolding downturn should be seen as a welcome cool-down following a two year-long frenzy that put a huge financial burden on many new homeowners and made ownership dreams harder to achieve,” Hogue says.