Home buyers rush for mortgage pre-approvals amid mounting signs of rate hikes to come

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As some economists predict, Canadians are scrambling to obtain mortgage pre-approvals and rate holds before the era of low interest rates ends.

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Real estate and mortgage brokers say their clients are looking for ways to hold on to current rates as many housing markets such as Toronto face heated conditions that have made it difficult to keep purchase prices low.

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“It’s a seller’s market and you hardly have the opportunity to place conditions (on the purchase) because 400,000 people are waiting for their permanent residence, 200,000 of them are already here and buyers are standing around the corners,” Estee Jacques, Toronto-based owner of Strategic Mortgage Solutions Inc.

“They feel weak, and they statistically are, so they’re trying to get the leg up as much as they can.”

rising demand

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Zacks has recently seen an increase in requests for rate hold, which freezes mortgage rates for up to 130 days.

Mortgage rates vary across banks, but Ratehub.ca shows that the top five banks in the country are offering five-year term mortgages for as low as 2.62 percent and a maximum of 2.94 percent.

Three-year fixed mortgages range between 2.49 and 3.49 per cent, while five-year variable mortgages range between 1.40 and 1.75 per cent.

The interest rate, which also falls on home buyers, has been sitting at 0.25 per cent since March 2020, but the Bank of Canada has indicated it could rise as the country continues to exit the pandemic and loosen restrictions.

An increase in both mortgage and interest rates would offset the nearly two-year period of rock-bottom borrowing costs. However, the lower rates have not done much to bring down the cost of housing.

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The Canadian Real Estate Association said the national median home price in September was $686,650, up 13.9 percent from $602,657 last year.

In Toronto, it was even more so. The Toronto Real Estate Board said the average price of a home sold in October rose nearly 20 percent to about $1.2 million, up from $968,535 in the same month last year.

A hike in rates will make those purchases even more expensive.

Short hiking adds up fast

4 note to investors, CIBC Capital Markets analyst Benjamin Tal wrote in a November 4 note to investors that a one percent increase in mortgage rates from current levels would cost the average new buyer $230, or 12 percent more in additional monthly interest payments.

“Potential buyers will face a higher interest payment trajectory, reducing demand for new and existing units, potentially slowing some of the critical construction industry,” he wrote.

“Current variable rate holders can choose to keep their principal payments untouched and thus absorb the full impact of higher rates — potentially at the expense of other expenses.”

If rates go up by 2025, he said, “the massive lending done during the pandemic will feel the full brunt of the higher rates.”

Vancouver real estate broker Tirajeh Mazaheri said buyers have noticed this and are rushing to get a mortgage pre-approved to offer any relief.

That said, many people took a closer look at housing prices and spent too much hoping to come down, but have now accepted that this will not happen.

“People are scared and they are saying that if interest rates go up, they will never be able to afford the city,” she said.

“What we are seeing is that a lot of people are trying to take advantage of pre-approval right now or getting approved so they can get their hands on something and not miss out on lower rates. Do it.”

Robert Cavik, senior economist at BMO Capital Markets, doesn’t think those people have long.

He believes the Bank of Canada will raise its rates faster than most people expect, and he is already seeing signs of rising mortgage rates.

In a November 3 note to investors, “mortgage rates in the five-year fixed space are already moving higher, but those who have the contracts probably have a month or two to buy something,” he wrote.

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