Canadian Real Estate Mortgage Pre-Approvals & The Market
When a borrower applies for a mortgage, they get something called a pre-approval. These allow the borrower to secure an interest rate while shopping for a home. Typically this provides buyers with 90 to 120 days of interest rate protection. It is much more practical for buyers not to change their purchasing power daily. It is strange that interest rates are rising so quickly, making this a strange situation. Data from mortgage comparison site Ratehub shows the average 5-year fix was 3.59% in June. That means those pre-approved borrowers have until October to buy at their guaranteed rate. A borrower in this case has a discount of almost 1 point and a limited time to use it.
Canadian real estate buyers are still motivated by pre-approvals
BMO argues that this provides a kind of buying cliff, where sales are still motivated at lower prices. Buyers with pre-approvals are debating whether their interest costs will rise more than rates fall. Home prices are falling, but they may fall even faster without pre-approvals. When there is a due date on your mortgage, you can value the speed of execution against the value. “Right now, it’s a bit of a unique situation where many potential buyers have pre-approvals in hand ahead of the big BoC tightening wave, while also looking at 10%-20% discounts on house prices,” he explained. Robert Kavcic, senior economist at the bank. He adds, “If you can buy at a discount with a mortgage rate that no longer exists, it could be tempting.”
A ‘huge’ shock is still in store for Canadian real estate
Current buyers do not fully reflect the impact of funding on liquidity. As a result, BMO told investors to expect further shocks, using Ontario to illustrate its point. “… the bigger picture is that there is still a huge interest rate shock to absorb. From an affordability perspective, the one-year increase in the cost of carrying an average home purchase in Ontario was only rivaled in the late 1980s (and that already incorporates lower prices),” explained Kavcic. This point may be clear to the industry. However, he clarifies for the average person, “In other words, this is the sharpest tightening of housing conditions in a generation, and it will come with further adjustment…”
