The Effects of High Mortgage Rates on the Housing Market: Understanding the Risk of Foreclosures

Edmonton Homes For Sale Real estate advice REALTOR® Edmonton wallyfakhreddine Edmonton real estate market 3 min read
Photographer: Zac Gudakov | Source: Unsplash

The housing market is a cornerstone of the economy, and it is deeply influenced by various factors, with mortgage rates playing a pivotal role. High mortgage rates can have far-reaching effects on the housing market, potentially leading to a surge in foreclosures. Read on to learn more about high mortgage rates and their impact on the housing market, including the risk of foreclosures.

High Mortgage Rates and Affordability

The economic landscape in Canada has shifted significantly in the past year or two. Inflation and interest rate hikes by the Bank of Canada are putting pressure on the housing market.

Homeowners who took advantage of record-low interest rates and purchased homes above the list price will be facing mortgage renewals in the near future. Approximately 20% of mortgages are up for renewal each year. Among those, there will be many homeowners who will be hard pressed to meet their mortgage payments amidst higher rates and a cost of living that is also much higher now.

Foreclosure Risk

Risk Management advisors are predicting a dramatic increase in foreclosures. When homeowners struggle to make their mortgage payments due to increased interest rates, they may ultimately face the threat of losing their homes. The risk of foreclosure increases under these conditions for a few reasons:

Increased Financial Strain: Homeowners with variable rate mortgages or those who recently bought homes with high mortgage rates may experience significant financial stress as their monthly payments rise. This strain can lead to missed payments and the eventual risk of foreclosure.

Negative Equity: If home values decline due to decreased demand in a high mortgage rate environment, homeowners may find themselves with negative equity, meaning they owe more on their mortgages than their homes are worth. This situation can make it difficult to sell the property or refinance the mortgage, increasing the risk of foreclosure.

Reduced refinancing options: High mortgage rates can limit homeowners' ability to refinance their mortgages at lower rates, making it difficult to alleviate financial strain. As a result, homeowners may be left with no alternative but to sell their homes or face foreclosure.

Real Estate Agents Must Do Their Due Diligence To Protect Homebuyers and Sellers

With conditions favourable for a spike in foreclosures, REALTORS® need to be familiar with the risks for their clients, both buyers and sellers, as well as for themselves. Top risks include:

  • Insufficient profits from the sale of the home to cover expenses including commissions.
  • Undisclosed registrations newly registered on Title such as a second or third mortgages that could derail the sale of the property
  • Deals that fall through because the proceeds of the sale cannot satisfy the mortgage

To mitigate these risks, your real estate professional should do the following:

Always pull the Title

Title should always be pulled at the time of listing, when an offer is presented, and prior to closing. All registrations on Title should be reviewed thoroughly and discussed with the client. It may also be beneficial to pull the Title prior to conditions being waived.

Get a clear picture of the property’s financial situation

Engaging in open, upfront conversations with sellers is extremely important. Find out how many mortgages are involved and if there are lines of credit secured by the home’s equity. Where will funds come from to cover any shortfall?

Ensure buyers are aware of any risks

Review the Title with buyers prior to any decisions or taking action such as making an offer or waiving conditions. Make sure buyers understand the risks associated with unconditional offers, particularly any risks related to not being able to close on the property due to the seller’s debt/mortgage issues.

Don’t overlook warning signs

An experienced REALTOR® with many years of experience will have fine-tuned intuition that will often pick up on warning signs that could jeopardize the transaction. Trusting those instincts and investigating further will always be worth the time and effort if it means avoiding bigger problems later on.

Real estate professionals must do their due diligence and gather all the relevant information their clients need to make the best, well-informed decisions possible.

As an industry leader, Wally is passionate about maintaining the highest standards and integrity in the real estate profession. Phone/text Wally at 780.238.7384 to discuss your real estate needs.
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