How Would a Canadian Recession Affect Mortgages?

recovery and recession street signs

How Would a Canadian Recession Affect Mortgages?

It’s a word most people don’t want to hear. For the past few years, we have caught whispers of it, and were told it might be coming. Finally, it’s being shouted from the rooftops: Canada may be facing a recession.

Although no-one is quite sure if we are there yet, it’s already all over the media. Most economists are calling it a recession. Yet Poloz wouldn’t use the word when he announced the Bank of Canada was lowering the benchmark interest rate for the second time this year. The finance minister won’t say the word either. According to this Financial Post article, “Finance Minister Joe Oliver says it’s too early to tell if Canada’s economy has slumped into a recession.”

Politics aside, what does it all mean to the average Canadian? How would a recession affect mortgages?

Lower Interest Rates

First the good news. If in a recession, interest rates are bound to stay put. That is beneficial for those in need of a mortgage. Interest rates are currently at all-time lows. According to today’s figures on ratehub.ca, bank interest rates in Ontario start at 1.99 percent. Ontarians can even get a Big Five bank mortgage with a 5 year fixed term for 2.69 percent.

For those who already have a mortgage, a recession should mean their variable rate will stay low or even go down. If locked into a fixed mortgage, it may be a good time to renegotiate a lower rate. If the penalties are too high, a blend-and-extend can allow homeowners to take advantage of the plummeting interest rates.

Hot Real Estate Market… For Now

Since it’s still cheap to borrow, the real estate market is sizzling. Canadians are taking advantage of low interest rates to get into the housing market. In Canada’s biggest cities like Toronto and Vancouver, real estate prices are through the roof. Bidding wars are bringing prices up and homes are selling at historical highs.

If a serious recession hits Canada, however, the story may change. Job losses may mean less money to buy homes. The market may cool quickly, sending real estate prices back down to pre-recession prices. An increase in interest rates may also act like a cold shower and send the economy further into recession.

Walking a Tightrope: Household Debt Levels and Housing Prices

Canadian household debt levels are at an all-time high. So are housing prices. This could leave many homeowners in a pinch if Canada experiences a serious recession. Unemployment levels may rise, making it difficult for Canadians to find the money to make their monthly mortgage payments.

Final Thoughts          

With the Canadian economy in a possible recession, there are no signs of mortgage rates going up any time soon. With mortgage payments being low, it’s the perfect time to work on getting rid of non-mortgage and high-interest debt. It’s tempting to keep borrowing at today’s super-low rates to get a bigger home or a better car. But Canadians need to make sure they can really afford to do so. After all, we don’t know exactly how a recession will affect us or how long it will last.

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