Your Maximum Purchase Price Is Now A Moving Target
Pre-Approvals Hold Rate But Not Maximum Purchase Price
This is a heads up to buyers and the Realtors who assist them! A couple of weeks ago we got to see an unintended consequence of the mortgage rule changes that now require a stress test on insured mortgages. Buyers with less than 20% down need to qualify at the Bank of Canada Benchmark Rate, not the lower contract rate they are actually getting.
The stress test has been in effect since last October. But, two weeks ago the Bank of Canada Benchmark Rate moved up for the first time since these new rules rolled out, increasing from 4.64% to 4.84%. It left banks and other mortgage lenders scrambling as they realized that any pre-approved clients immediately had a drop in their maximum purchase price. It was a small change but for those shopping at their maximum it can be the difference between a lender approval or a decline.
Your Rate Can Be Held, the Bank Of Canada Benchmark Rate Cannot
The requirement for buyers to qualify at the Bank of Canada Benchmark Rate is triggered when a mortgage is submitted to the insurer for approval once they have an offer on a property. A buyer can hold their contract rate by doing a pre-approval with a lender, but this does not protect them if the Bank of Canada Benchmark Rate moves up. They will still have to qualify at the current Bank of Canada Benchmark Rate when they actually write an offer. If the Bank of Canada Benchmark Rate moves up while a pre-approved client is out shopping, their maximum mortgage amount will drop.
So How Do We Pre-Approve People Now?
Pre-approvals were never guaranteed. The have always been subject to lender and insurer approval when an offer was actually written. This just adds another variable that can impact that final mortgage approval.
My approach to pre-approvals is educating buyers on how a maximum purchase price is calculated and providing them with the assumptions that go into their maximum purchase calculation. When I pre-approve clients, they will be given a list of the variables or assumptions that go into their maximum purchase calculation. These include condo fees, property tax amount, the current Bank of Canada Benchmark Rate, and heating costs. These assumptions should be shared with the buyers Realtor. If any of these variables change while they are out shopping, it is important for them to revisit their maximum purchase, particularly for those buying near their maximum.
What Should Buyers Do?
Buyers can prevent failed financing attempts by working with a mortgage broker or lender who will help you understand how mortgage qualification works and the variables that go into their approval. Once pre-approved and out shopping, remain in contact and if properties you are looking at no longer line up with the parameters when you first did your pre-approval, it is time to call your lender and confirm that you still meet qualification guidelines.
Buyers should also protect themselves by writing any offer on a property subject to satisfactory financing so you can confirm a lender and insurer will approve your mortgage before your deposit is on the line.
Where Does The Bank Of Canada Benchmark Rate Come From?
The Bank of Canada Benchmark Rate has become key in lending, but where does it come from? It is currently 4.84%. Each week the Bank of Canada polls the big banks in Canada on their current 5 year fixed posted mortgage rate. The Bank of Canada Qualifying Rate is the average of those numbers. As mortgage rates move up, so will the Bank of Canada Qualifying Rate. It is identified as the Conventional mortgage - 5-year on the Bank of Canadas Daily Digest:
Bank of Canada Daily Digest August 11
If you would like your pre-approval revisited or have a client that needs a second look given these changes, please do not hesitate to contact me.
Canadian home sales fall further in July
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales declined further in July 2017. Highlights:
National home sales fell 2.1% from June to July.
Actual (not seasonally adjusted) activity in July stood 11.9% below last Julys level.
The number of newly listed homes edged back by 1.8% from June to July.
The MLS Home Price Index (HPI) was up 12.9% year-over-year (y-o-y) in July 2017.
The national average sale price edged down by 0.3% y-o-y in July.
Julys interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer, said CREA President Andrew Peck. Even so, sales activity continued to soften in the Greater Golden Horseshoe region. Meanwhile, sales and prices in Montreal continue to strengthen. All real estate is local, and REALTORS remain your best source for information about sales and listings where you live or might like to.
July marked the smallest monthly decline in Greater Golden Horseshoe home sales since Ontarios Fair Housing Plan was announced in April, said Gregory Klump, CREAs Chief Economist. This suggests sales may be starting to bottom out amid stabilizing housing market sentiment. Time will tell whether thats indeed the case once the transitory boost by buyers with pre-approved mortgages fades.
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Decline in single-family component moderated by gain in multi-family dwellings
Canadian municipalities issued $8.1 billion worth of building permits in June, up 2.5% from May and the second highest value on record. Higher construction intentions for multi-family dwellings and commercial buildings were mainly responsible for the national increase. All building components reported gains in June, except for single-family dwellings.
The value of residential building permits fell 0.9% in June to $5.0 billion, the fourth decrease in five months. The decline was mainly the result of lower construction intentions in four provinces, notably Ontario.
In June, the value of permits for single-family dwellings decreased 12.5% to $2.4 billion. Seven provinces registered declines, with Ontario being the main contributor to the decrease.
Conversely, construction intentions for multi-family dwellings rose 12.5% in June to $2.7 billion, marking a third consecutive monthly increase. Seven provinces registered gains, led by Ontario and British Columbia.
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