Are you currently making mortgage payments, or are you considering purchasing a home? The word “recession” can feel unnerving. Understanding how it actually impacts your finances, especially your mortgage, is key. 

This post breaks down how recessions can shake up mortgages so you’re ready for anything. We’ll look at how recessions mess with interest rates, home prices, and keeping your mortgage manageable.

What Exactly Is a Recession?

Basically, it’s when the economy takes a tumble. Usually, that means the country’s gross domestic product (GDP) shrinks for at least two three-month periods in a row. You’ll also see things like more people out of work and shoppers not spending as much, which shows people aren’t feeling so confident in the economy.

Canada’s seen its share of recessions, like back in 2008 during the big financial mess and more recently with COVID-19. These times show you how much recessions can mess with housing and mortgages.

How Recessions Mess with the Housing Market

The home market is undoubtedly thrown into a loop during recessions.

• Home Prices Might Dip: When people are unsure, demand usually drops, which in turn can pull down home prices.
• Things Slow Down: Don’t be surprised if you see fewer homes for sale and fewer people buying as the market cools off.
• Banks Get Pickier: Banks tend to get a lot more careful about who they lend money to, making it harder to get a mortgage.

Basically, recessions change the whole vibe of the housing market.

What Happens to Mortgage Rates?

In this case, the Bank of Canada is crucial. Often, they’ll lower interest rates when a recession hits to try to get people borrowing money again. Mortgage rates are directly impacted by this.

• Good News for New Borrowers: You might find some appealing interest rates if you’re just getting a mortgage.
• Time to Refinance? If you already have a mortgage, this could be a chance to refinance at a lower rate.
• Fixed or Variable? Big Question: It becomes considerably more crucial to choose between a fixed and variable rate. Variable rates drop right away when the Bank of Canada cuts rates, but they can also go up. Fixed rates give you stability, but you won’t see that immediate drop.

Job Loss Worries and Income

This is a biggie. Losing your job can obviously make those mortgage payments a real struggle.

• Losing Your Job: Recessions can lead to layoffs, which puts your ability to pay your mortgage at risk.
• Savings Are Your Friend: Having an emergency fund is super important to cover those payments if you lose your income. Mortgage insurance can also offer some extra protection.
• Risk of Losing Your Home: If you don’t have any backup plans and can’t make payments, you could end up defaulting on your mortgage and facing foreclosure.

Getting a Mortgage Gets Tougher

Banks get a lot more careful about lending during recessions. Expect them to be stricter.

• Higher Standards: They’ll be looking at your application with a magnifying glass.
• Need a Stronger Profile: You’ll likely need a better credit score and proof of a steady income to get approved.
• Tougher for the Self-Employed: If you work for yourself, your sometimes unpredictable income could make things more difficult when applying.

Thinking About Refinancing?

https://www.youtube.com/watch?v=L4OUxqvwZbk 

Refinancing can be a smart move during a recession, but there are things you should keep in mind.

• Possible Benefits: Getting a lower interest rate could save you a good chunk of money.
• Watch Your Home Equity: If your home’s value drops, you might not have enough equity to refinance.
• Breakage Fees: Figure out what the penalty is for breaking your existing mortgage. Those savings need to be bigger than the cost of breaking your old mortgage.

Government Help and Relief Programs

The government often steps in to provide support when times get tough.

• Remember the Past: During COVID-19, CMHC offered ways to pause or delay mortgage payments.
• Deferrals and Forbearance: These kinds of programs let you put off or lower your payments for a while.
• How to Get Help: Stay up-to-date on what programs are available and talk to your lender or a mortgage professional to see what you can do.

Tips for Staying on Top of Your Mortgage

Taking action early can really help.

• Revisit Your Budget: Trim any unnecessary spending to free up some cash.
• See If Refinancing Makes Sense: In order to reduce your monthly costs, think about refinancing.
• Mortgage Comes First: Make sure paying your mortgage is a top priority.
• Talk to Your Lender ASAP: If you think you might have trouble making payments, reach out to your lender right away. They might have options to help.

Recessions bring uncertainty, no doubt. However, protecting your house and your money can be achieved in large part by being organized and taking proactive measures. Get a handle on how recessions can impact rates, home values, and your job security.

Want to feel more confident about your mortgage situation? Get in touch with Sandra Brown Mortgages today! We can help you review your situation, explore possibilities, and plan proactively for future challenges. Don’t hesitate; we’re here to assist with smart action and securing your financial future, even during tough economic times.