Welcome to Mortgage Rundown, a brief overview of the real estate finance landscape in Canada from a mortgage strategist Robert McLister.
You can’t get a mortgage without an appraisal and in most areas appraisal values drop like a brick.
For homebuyers in need of a mortgage, valuation risk creates anxiety.
When house prices dip people wonder about things like, what if I apply for a mortgage and get my appraisal today, but don’t close until three or four months? Will the lender still honor today’s value if prices drop before I close?
Skyrocketing Rates or Falling Home Prices: Which Will Affect Your Mortgage Approval the Most?
After all, the last thing you want is to be firm on a purchase agreement and have a lender withdraw your mortgage approval because the value of the home plummets.
Some welcomed the certainty
Usually, the valuation is done at the time of the application, notes Olympia Baldrich, vice-president, secured real estate loans, at the Toronto-Dominion Bank. Banks typically honor that assessment for the duration of a customer’s rate hold, she says. And lenders typically hold (guarantee) mortgage rates for up to 90-130 days after you apply.
That said, with the national average home value dropping nearly 1% per week, time is running out when ordering appraisals. This is especially true if you need a loan of up to 80% of the property’s current value, the maximum allowed for a conventional mortgage.
“Get the appraisal done the day after you buy a home,” says Shawn Stillman, mortgage broker and co-founder of Mortgage Outlet. Ordering an appraisal as soon as possible eliminates the mortgage risk of price depreciation before closing.
Incidentally, this is also imperative if you are refinancing and want a maximum loan-to-value ratio of 80%. If you need a $400,000 mortgage on a $500,000 property, for example, and a few panic sales in your neighborhood drive its value down 2% before appraisal, that lowers the maximum refinance amount. at $392,000.
Remember that appraisers base their value estimates on sales of comparable properties. “With so many ads not selling, you just need a divorcing neighbor to train your comparables,” Mr. Stillman notes.
Parting advice: if you have a distant close and are using a more obscure lender (e.g. a small, unpreferred lender), be careful. Check ahead of time that they won’t reappraise the property or ask for more equity if the home’s value drops before your mortgage closes.
Nearly four in 10 (38%) existing mortgagers don’t know how a home equity line of credit differs from a mortgage, according to TD’s 2022 Real Estate Survey.
But ignorance does not mean risk, banknotes.
“What attracts them is the wording,” says TD’s Baldrich. People think they have a mortgage when they actually have a HELOC. At many large banks, the majority of the conventional mortgages they sell are tied to a HELOC.
“I don’t see a direct link between defect rates and product understanding,” she says. Clearly, with only 1 in 1,000 HELOC borrowers more than 90 days behind on their payments, there is virtually no connection between the two.
Slight near-term hope for mortgage rates
The lowest mortgage rates in the country have not budged one iota this week.
Some less competitive lenders have followed bond yields lower and cut their longer-term fixed rates by 5 to 10 basis points. But so far, that’s all. (There are 100 basis points in a percentage point.)
Canada’s five-year yield has plunged 55 basis points over the past three weeks as fear of a recession (normally bearish for rates) outweighs fear of inflation (normally bullish for rates). Most competitive lenders are now on hold, waiting to see what yields will do after next Wednesday’s Bank of Canada meeting.
Speaking of the Bank of Canada, the market is pricing in an 85% chance of an oversized 75 basis point rate hike at its July 13 rate meeting. This would take the prime rate to 4.45%, its highest level in 14 years.
A rising prime rate will also strengthen the mortgage stress test. To date, borrowers have been able to qualify for a mortgage using the Minimum Qualifying Rate (MQR) of 5.25, if they choose a variable rate.
If the lowest conventional floating rate of 2.9% jumps 75 basis points next week to 3.65%, that means its stress test rate will climb to 5.65%. For borrowers about to be approved – due to high debt ratios – this could push them out of the qualifying range, further weighing on home prices.
For this reason, we could see a disproportionate number of marginal borrowers applying for mortgages over the next six days.