Increasing numbers of homebuyers in Quebec are assuming sellers’ mortgages to help combat rising interest rates and higher mortgage costs, Re/Max Canada says.
The province is also seeing an increase in mortgage transfers and cash payments, primarily among high-end buyers, reports the brokerage in its 2023 Fall Housing Market Outlook.
Opting to assume sellers’ mortgages is “everybody’s number one choice right now,” says Patricia Hamelin, a real estate broker with Re/Max du Cartier in Montreal with 15 years of experience. “Nobody would do it in the past because everybody would get a better rate.”
Hamelin has never seen buyers assume sellers’ mortgages before, noting that “rates have basically been good since I started in real estate in 2008.”
Assuming a seller’s mortgage is not that easy, she noted, as buyers must remain with the sellers’ financial institution, and every bank has different conditions.
While most fixed-rate mortgages can be assumed by a new buyer, variable-rate mortgages and home equity lines of credit typically cannot, according to the Financial Consumer Agency of Canada. The buyer must obtain approval from the lender to assume the mortgage, take over the remaining payments and adhere to the original contract terms.
In certain provinces, sellers might remain personally liable for the assumable mortgage after selling the property, potentially being asked to cover payments if the buyer defaults. However, some lenders may release sellers from this liability if they approve the buyer for the mortgage.
Buyers are also transferring their mortgages to their new homes if their current mortgages are favourable, Hamelin explains. “Basically, the point is that people are trying to hold on to those (lower) rates as much as they can if it’s a possibility.”
More high-end buyers are paying in cash to avoid higher interest rates, Hamelin said. When interest rates were low, even buyers with lots of cash would prefer taking out low interest rate mortgages because they could make money elsewhere, “but now I’m not sure that’s the case.”
Asked to choose a preference between a low interest and high interest rate environment, Hamelin said a middle-ground would be a preference for brokers. However, she notes she has seen only the extremes during her career.
With today’s high interest rates, “making the next move is a little bit more complicated for people, so it gives us a little bit more roadblocks.” Brokers have to discuss several different mortgage scenarios for clients seeking the best possible deals.
Sellers must give much more thought to how much their mortgage will cost in their new homes. “Today, the thought process is longer. It’s not as simple,” Hamelin said. “When interest rates were lower, that was one thing that you just didn’t even talk about.”
In addition, with inventories low, potential buyers are reluctant to leave their current homes. “You’re not going to sell it if you don’t know where you’re going to go. We have a ton of clients that want to buy, but they have to sell, and they don’t know where they’re going to go.”
Hamelin said most clients who are unable to assume the seller’s mortgage or transfer their mortgage are opting for fixed-rate mortgages. “The mortgage brokers that we work with are telling our people to go between two and three years,” she said.
“We’re seeing a whole mix of things, but most clients are not taking variable.”
The popularity of variable-rate mortgages soared during the pandemic when the Bank of Canada lowered its benchmark interest rate to 0.25 per cent. According to Rates.ca, variable-rate quotes on its site comprised 57 per cent of total mortgage quotes by July 2022. However, variable-rate quotes fell to 26 per cent of total mortgage quotes in December 2022, after the Bank of Canada overnight rate increased substantially.
Assuming sellers’ mortgages is not a new trend, said Charles Brand, director of the market analysis service at the Professional Association of Real Estate Brokers of Quebec.
“When financing conditions are more difficult, different strategies always emerge,” Brand said. “People are just trying to find alternatives. It’s not a trend; it’s a phenomenon that occurs when financing conditions are difficult.”
Some first-time buyers have found alternative solutions to avoid the sting of high interest rates, he said. One is buying duplexes or triplexes and using the rental income to offset mortgage costs. In some cases, people are renting with an option to buy.
Parents are also often helping their first-time home buying children — a phenomenon also known as the bank of mom and dad. According to Brand, 25% of first-time buyers received assistance from relatives for their mortgages.
Brand added that buyers are also opting for non-traditional financing from private banks that are not subject to mortgage stress tests of chartered and federally regulated banks. Others are paying larger down payments to reduce the sizes of their mortgages.
