Financing in Today’s Real Estate Market

Hi everyone, I’m James Garbutt. And I’m Denny Dumas. And this is the Garbutt Dumas Real Estate Podcast.

James: What you need to know about financing in today’s market? 

Well Denny, where do we begin with this one? I think it’s important that we just refresh people’s memories or just provide information about financing today. You know when you’re buying a home in this action packed market where multiple offers are fairly common. You’re making rush decisions with lots of money in a high rate world. And you need a bank to finance that.

So what do people need to know? 

Denny: It’s changed dramatically in the last 18 months. You look at January to April of 2022. A typical mortgage rate was 2%, two and a half percent. The stress test was calculated on the greater of your contract rate plus two or the benchmark rate which is 5.25.  So in an environment where rates are in that two to 3% range, you are stress testing on 5.25%. 

In today’s environment when a 5.5 rate is very common. You are now stress testing on 7.5. So that’s a roughly 2.5% difference on the stress test, which means your purchasing power has gone down pretty significantly in that like 25% to 30% range comparatively to a year and a half ago. Has market value is going down 25% to 30%. Don’t think so. Definitely not. 

We’re doing another podcast. The next one is comparing market values from 2016 to COVID to today, so we will share through that but they’re definitely not down 25% to 30%. 

So the I think just the the whole landscape of getting approved and what you get approved for looks very very different comparatively.

James:  You’d say the purchasing power, the lending ability is down

Denny: 25-ish percent.

James: 25-ish percent. 

Denny: Yeah. 

James: I think the interesting there is it kind of just shows the stickiness of the market. You know, when the market when something happens that reduces, like prices go up quicker than they go down often. Now there might be a few exceptions in there, but maybe the fall of 2008 might be one of them. But in general, they’re a little bit stickier to come down when you’re boring power. We haven’t seen prices go down 25% Even if someone can get 25% less of a mortgage. 

But what I will say is we’ve had a lot of upward trending moments in the market over the last decade and when lending goes the other direction and your borrowing power goes up 20%. What you tend to find often is that the if you’re looking at a first time homebuyer, that’s a pretty good example of a first time, if a typical first time homebuyers lending goes up 20% and you look at the products they buy, maybe it’s a one bedroom in Yaletown or whatever I mean, that’s a expensive first time purchase, but reasonable for many, they tend to go up by the increase in the lending ability over maybe a six to 12 or 18 month period. 

But when you make lending more affordable, and people’s lending loans go up, you start seeing the market prices kind of go up at the same time with them or a little like a little bit behind but when they take away that lending from him and they go down well right now we’re seeing the prices hold so it’s it’s just kind of a an interesting relationship. 

You give people more money. Prices go up, you take away their money, they hold for a bit because lack of supply and we’ll see if they go down maybe they will in the winter, but I would be shocked if prices went down 10% or 20%. 

Denny: Should we talk about rates? 

James: Yeah.

Denny: A typical variable right now. So the remember variable works off the primary rate. The primary rate, now as of June 7 is 6.95%. And banks have kind of banks have got tighter with their discounts. 

So in 2020-2021, it was fairly common to see a discount of 1% 1.1% and on the high end, so the least amount of discount. Scotiabank right now is anywhere from plus, so prime plus 0.05% to about minus .1. That’s kind of the very, very low end. TD and HSBC are offering roughly prime minus point seven right now. So that’s actually much better than it was even six months ago in the Fall of last year. I remember seeing like a good discount minus point three. 

So we’re seeing some banks start to loosen up that discount as prime is going up and go as prime went up again, but TD, HSBC are leading the charge right now in the variable world of minus point seven., Typical five year fixed rate. If you have an insured mortgage, which means you are putting less than 20% down you typically get a better fixed rate. And that is just over 5% That was down like Jamie mentioned into the mid fours 4.6 4.7 kind of range. But that now will be about 5.1 

James: It feels like it’s gone up half a percent in about a month or six weeks or so.

Denny: Yeah. And if you are taking a conventional five year fix which means you’re 20% or more down that rate is looking in a range of 5.6 5.7 right now.

James: You know there’s there’s a lot of talk over the last decade about “variable always wins”. Right now variable is not like we’re one of those moments where there were the exception and people in variable rate mortgages that didn’t lock in a fixed prior to this rate hike are feeling it right now. 

But right now is a five year fix the right move? Is it a two year? Three year? You know those are the conversations I’m having it’s not about I think some people are just biting the bullet and going for the five year but I’m having more conversations about two and three year fixed mortgages with the anticipation that you get pay a higher interest rate for two to three years and then you’re gonna have much better options after. 

Unknown. You know, at the end of the day, your mortgage payment is higher, your interest is higher. But the price you  pay for a property today should be much lower than it will be when you wait for them to get lower. And I think the savings is going to work out in your favor over the long term. 

Denny: Speaking of a mortgage payment, on that insured mortgage, let’s say five year fixed just over 5%. You’re looking at about $583 per $100,000 borrowed money versus a conventional mortgage where your rate is in that 5.6 range. You’re gonna be over $600 bucks, it’s gonna be about $620 a month per $100,000.

James: Per $100,000 in mortgage. I listened to something at five and a half percent mortgage, if you get a $1 million mortgage at five and a half percent over the term with a 30 year amortization, over the term of that mortgage, you’re paying a half, sorry, a million dollar mortgage, five and a half percent, over the term of that mortgage, you’re paying $1.03 million in interest. 

So you’re paying just over the balance in interest. In the first five years 77% of your payments are going to interest. So the first five years on a million dollar mortgage are five and a half percent as $262,000 going into interest and then $72,000 paying down your principal. A lot of interest but you’re using bank money. 

Yeah, then openly Denny, the rate right now, you mentioned five year fixed being in low fives, where do you see that being you know, this is where we shouldn’t be overly predicting. But how high did you think it’s gonna get higher? Where do you think this is the peak of it? What is the, what’s the temperature? If you were to have your crystal ball right now? 

Denny: You’re setting me up for failure. 

James: Yeah, let’s put that crystal ball out there. It can go either way.

Denny: My guess now is that there’s gonna be one more point two 5% rate hike, towards the end of 2023. My guess is that that five year fixed rate will peak in the 58-59 range. I think we’ll see a couple basis points increase through the next six months and then 2024 it’ll start to come down. That’s my guess.

James: I think it coils start, I think we could see and this is again, wild predictions here, but your, you know, I agree with you. It could go up point 2 to 2.4% in the short term, maybe maybe more if it’s a high fives. I think they’ll start coming back at the end of this year. I really, I’d like before, maybe not the overnight rate or the prime rate but the five year fixed, the fixed rates, I could see them start coming down.

I, you know, I was pretty surprised when, I didn’t expect another five point half percent increase over the last 30 days. Probably could go backwards at the tail end of this year. You know, I when they see the data of slow sales in August, September, October, might start working its way through. 

Denny: One can only hope Jamie.

James: How about we go into some of the financing things people should know when they’re buying a home like a pre approval versus an approval? You know, there’s the important thing I think to know is the amount of risk you’re putting on that purchase, that offer if you, especially if you don’t have a subject to financing. 

I mean, just on that note, it’s always important to start with a pre approval. So when you’re going to buy a home, whether you’re looking anxiously and ready to offer any minute or whether you’re just opportunistically looking and there might be one home a year that you want to purchase. 

The perk of a pre approval is you know exactly how much you have to work with. And typically it comes with a rate hold for 120 days. So right now, in this market in June, if you had that rate hold you’d be thanking yourself because the rate hold you’d have is cheaper than the market rates available. 

But it’s a pre approval it’s important to it’s not a guarantee of money. So even if I had a pre approval the day where I could get pre approved up to a million dollars to buy a property. It’s a conditional approval, it means it still relies on my income and downpayment to be there. So my income might be subject to confirming my income before the funds are issued, that might prompt my downpayment funds and they need to appraise the property. So you know, if you get a pre approval just recognize that a pre approval versus affirm approval are two very different things. 

Pre approval, bank has outs. Bank can pull that money out. A firm approval is when you just have an unconditional approval where they appraise the property, they have all your income statements, they have your employment confirmation, and they are good. 

But even then there can be some scares at completion, if things happen.

Denny: Pre approval is always going to be conditioned by approving the property. So if you don’t have an accepted offer or if you’re a few months away from writing offers, you are, the bank is going to ask to see a property disclosure statement from that property. They’re going to ask to see the contract, they’re gonna want to do an appraisal. 

If you’re paying $2 million bucks for a home that they appraised at $1.5 million. Guess what? That pre approval doesn’t mean that much. They’re going to lend on $1.5, not $2 million. 

So that’s really the big difference is, is pre approval, they’re basically approving you as a financially capable human, that you can afford up to a certain amount of money based on your income and debt etc. 

And then the firm approval comes into play when you have an accepted offer on a property, then they are conditionally approving the property.

James: Yeah, just talking about the property, items that can affect an approval. I mean, if you’re buying a house, if it had to grow op that affects some lenders, some lenders won’t lend on to grow op. It’s an unfortunate that’s still the case because if you have a grow op it has to be remediated and you got to go through city inspections and houses usually pretty good after that. Maybe that will change.

 House could be in poor condition. Like if a house is old and falling apart, they might deem the lifespan of a home to be another 15 years and if you’re trying to get an amortization of 25 or 30, they’re not going to give that to you. And so it will either affect the payment because they’ll give you a lower amortization or they may not allow you to buy with 20% down you might need 35% or more.

Denny: This is a really big one on on older single family in Greater Vancouver and also a good idea as a realtor. If you are a listing agent, a buyer’s agent, to show up to the appraisal, to educate the appraiser on how many people came through, that they got multiple offers, here’s the accepted offer price. And even noting that the buyer is like obviously getting financing so we need a lifespan on this home of 30 years in order to qualify for a 30 year amortization.

James: The better as a listing agent, the better the sale price I get the more paranoid I am about the appraisal.  So the more likely I am to be there for the appraisal. Oh yeah sure, we had five offers and this was the number and here’s your comp if needed, you know, it just makes sure that appraisal goes well.

Because even if the buyers remove subjects, the deposits are in, the place is sold. If that appraisal doesn’t go well you’re gonna get an unfavorable surprise or you’re open to risk and even if you’re on the listing side, you’re like, oh, it’s not my issue. It is your issue if they can’t close when it comes time to close.

Avoid headaches. Help that appraiser out. Don’t, I mean there is the option of getting a second appraisal if the first one doesn’t work out. I’ve seen that before but it’s a little scary. 

So I’m talking, we’re talking about the houses with a conditional house to grow op, a high purchase price. You know, like you said Denny, if you’re paying way more than it’s appraised that that can affect your loan. 

And for condos and strata properties, sometimes the bank will request additional documents, they might want to see depreciation reports, engineering reports, Form B, AGMs. A major assessment of work being done on a building could affect its lending. You know if there’s a leaky condo or parkade membrane coming up, or you name it that comes with a $50,000 or $100,000 assessment, that could affect a bank’s ability to loan on it. 

Denny: Even if a seller is paid that assessment like let’s say they did a parkade membrane and it costs that unit $25,000. In the middle of the project, some banks have a problem lending during that project because they don’t know if it’s gonna go over budget, if that buyer is gonna have to contribute another $10 grand.

So in a major project for a building, it can be difficult to get lending halfway through the project.

James: Absolutely. And I think just lending right now in construction is tough. It is expensive and it is hard to qualify and a lot of banks aren’t doing it. 

Denny, we talked about pre approval versus approval. We talked about stress test, touched on mortgage payments. Hard to make money as an investor right now. One of the headlines I saw there is investors are losing money and they’re like cash flow is not good. I mean, of course if you locked in a 1.8% five year fixed mortgage rate you’re sitting pretty but cash flow is hard to find right now and it will come back one day but it’d be better one day but it’s tough.

Rate holds again, when they get pre approval of 120 days. Right now we’re in that period where the rates were better before they are today and that could be part of the, part of the story behind the market we’re seeing right now. We’ll see how many transactions happened in the Fall with 5.5% rate holds.

But anything else that comes to mind from your end Denny on financing in today’s world?

Denny: I think we covered a lot. 

James: Number one thing is talk to a mortgage broker and if you don’t have one we happily recommend you some great names. Someone that just does mortgages, that’s their specialty, they understand the urgency of it. 

If you bank with a bank, if you just like going in and talking to the account manager that does a bit of everything recognize that they might not be able to get you qualified in the short time you need to while you have a pending offer. Sometimes your offer has three days or five days to remove subjects. A good mortgage broker can make that happen but if you talk to an account manager that does it all, they might say two weeks, no ifs, ands or buts and that could jeopardize your deal. 

So feel free to reach out if you need any recommendations on a mortgage broker you can call, email Denny direct or myself. Denny’s at:  ac.etatselaerDGobfsctd@ynneD and I’m at: ac.etatselaerDGobfsctd@semaJ