The Canadian real estate markets recently underwent a shock, but more is to come. Recently, BMO informed investors that they anticipate mortgage pre-approvals to support markets. Since many people secured their interest rates months ago, a large portion of today’s home transactions do not accurately represent current mortgage rates. The bank cautioned that the decline in purchasing power will cause another shock in the upcoming months.
Mortgage Pre-Approvals for Canadian Real Estate & The Market
A pre-approval is something that a borrower gets when they submit an application for a mortgage. These give the borrower the chance to lock in a rate while looking for a home. Buyers often receive 90–120 days of interest rate protection from this. Customers would find it much more convenient if their purchasing power did not change daily.
It is strange that interest rates are increasing at such a rapid rate. According to data from mortgage comparison website Ratehub, the average 5-year fixed rate was 3.59% in June. This means that the pre-approved borrowers have till October to purchase at their secured rate. In this case, the borrower has a roughly one point discount and a constrained amount of time to use it.
Pre-approvals Continue To Motivate Canadian Homebuyers
According to BMO, this creates a sort of buying cliff where lesser rates of sales motivation still exist. Pre-approved buyers dispute whether their interest rates will increase more than prices decline. Although home prices are declining, they might do so considerably more quickly in the absence of pre-approvals. You might prefer speed of execution over value if your mortgage has an expiration date.
According to Robert Kavcic, a senior economist at the bank, “at this specific time, it’s a bit of an unusual circumstance where many potential purchasers have pre-approvals in hand from before the huge wave of BoC tightening, while simultaneously looking at 10%-to-20% discounts on home prices.”
It could be alluring if you can purchase at a bargain with an old mortgage rate, he continues.
Canadian Real Estate Is Still in for a “Enormous” Shock
The effect of financing on liquidity is not fully reflected in current buyers. As a result, BMO warned investors to prepare for another shock, giving Ontario as an example.
“… the wider picture is that we still have to deal with a significant interest rate shock. In terms of affordability, the one-year increase in the carrying cost of a typical Ontario house purchase (and this includes already-lower prices) has only been matched in the late 1980s, according to Kavcic.
The industry might understand that argument perfectly. The average person, he emphasizes, will need to make further adjustments because “this is the harshest tightening of housing circumstances in a generation.”