Why You Need a Mortgage Pre-Approval When Interest Rates Rise

The property playing field has changed considerably over the summer months. First we had the Ontario government’s Fair Housing Plan; then the Bank of Canada got in on the act by hiking the overnight lending rate. Those two levers have certainly proven effective in slowing the housing market in the GTA with sales and prices dropping.

For prospective home buyers, it’s something of a catch-22. Increased interest rates mean it is now harder to obtain a loan, although that may be offset by improving affordability. Currently, it is hard to judge if a person making their first step onto the property ladder is better off today or in April before government and central bank intervention.

More Interest Rate Hikes to Come?

It’s why many people are adopting a “wait-and-see” approach – and in the opinion of CanWise Financial mortgage broker Mike Bricknell, the BoC is most likely preparing for another hike before the end of the year.

“Parliament is off right now, so we probably won’t see a rate increase over the next month,” he explains. “I do think after that there will be another increase. October 25 is when the Bank of Canada has its next outlook, but I don’t think a rate hike will happen then – instead it will be on December 6.”

In its most recent outlook, the central bank identified positive growth indicators both domestically and at internationally for reasons for optimism. Another factor in the increased rates has been higher yields in the bond markets, as Bricknell explains.

“We are directly affected by Canadian bond yields, which have been increasing for some time now,” he says. “As bond yields increase, the offset is that mortgage rates won’t be far behind. It’s the spread for the banks, when yields are up they will increase the fixed rate so they can keep on making money.”

Why You Need a Mortgage Pre-Approval As Rates Rise

With higher rates making financing more difficult for buyers, there are a number of scenarios that may play out for those on the selling side of the equation. For anyone who managed to get a locked-in rate before the July 12th hike, the impetus is there to buy now before another BoC increase.

Related Read: How to Calculate Your Mortgage Affordability

That motivation may have even stoked the market in July; the Canadian Real Estate association found the pace of slowing sales let up somewhat during the month, potentially fueled by pre-approved buyers.

“July’s interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer,” said Andrew Peck, president of CREA.

Added Chief Economist Gregory Klump, “Time will tell whether that’s indeed the case, once the transitionary boost by buyers with pre-approved mortgages fades.”

The industry is looking to September to see if buyers are back in force for Toronto condos and Toronto townhouses, as it’s typically a hot real estate season.

Are Better Deals in Store?

The sentiment currently seems to be that house prices are coming down, so even with higher rates around the corner, many buyers are electing to bide their time and see where house prices end up a few months from now.

As someone having these conversations on a day-to-day basis, Bricknell has noticed the behaviour of both buyers and sellers shift.

“Over the last few years we have seen investors buying up a lot of properties,” he says. “Now lenders are coming down on people that own many properties and it is harder to get financing and refinancing. We may see investors selling off their homes, but I don’t see a lot of extra inventory coming on the market.”

For those not in the process of either buying or selling, but with decades of mortgage payments ahead of them, the rate hike leaves a number of options, depending on loan type. For those on a variable rate mortgage, announcements by the Bank of Canada will take on added significance. If Stephen Poloz shows signs that higher rates are here to stay, now maybe the time to switch to a fixed plan.

About Daibhead O’Ceallacháin

Daibhead O’Ceallacháin is a freelance writer from Ireland that moved to Toronto in 2010. Writing for his local newspaper, he covered real estate during Ireland’s “Celtic Tiger” era and the subsequent housing crash and financial crisis. Today he writes about real estate, finance and politics in Canada, the U.S., Ireland and England.

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