Higher interest rates could become a problem for some buyers of pre-construction homes, according to a mortgage broker.
Leah Zlatkin, a mortgage broker and expert with LowestRates.ca, said buyers of pre-construction homes are often pre-approved for their mortgage up to three years in advance to its completion.
According to ReMax, buyers of pre-construction homes put down a deposit and the builder sets a date to deliver the home. Upfront costs are generally lower as the deposit or down payment occurs at set intervals.
“A lot has changed over the course of the last two years. So if you bought something pre-construction two years ago, you might not be working in the same industry or different things may have changed [for you] financially,” said Zlatkin.
Over the course of the pandemic, many people have experienced changes in their finances, Zlatkin said. Interest rates have increased substantially and buyers are required to pass a stress test at much higher levels, she said. This means that some buyers may no longer qualify for the mortgages they would have been pre-approved for just a few years ago, according to Zlatkin.
“The lender who you signed up with when you purchased the home does not actually have to fulfill that obligation if there has been a substantial material change in your income, in the property, [or] in a number of other factors,” she said.
Before the Bank of Canada’s interest rate hiking campaign, most individuals were stress testing at 5.25 per cent, according to Zlatkin.
The stress test proves to financial institutions that a buyer can afford their home even if interest rates increase. To meet the stress test requirements, a lender will use the higher value of either the buyer's actual rate plus two per cent or 5.25 per cent, according to True North Mortgage.
WHO IS AFFECTED?
There are several groups of buyers who may be at risk of being prevented from taking ownership of their pre-construction property, according to Zlatkin.
“The over-leveraged investor is the first group. Somebody who maybe signed up for a few too many pre-construction properties, or who was banking on a certain amount of income coming in from one or more of their rental properties and they may not be getting that same income coming in,” she said.
People who have had their employment status change during the pandemic could also be affected, Zlatkin said.
Buyers who barely passed the stress test at 5.25 per cent may also be impacted, as they may no longer pass the test amid higher borrowing costs, she said.
“And the last group is people who…might have purchased the pre-construction home with the intent to sell their current home and make a substantial profit on their current home. And [they] may not be making a substantial profit anymore and therefore need to qualify for a larger mortgage that they’re not going to qualify for,” Zlatkin said.
If a buyer cannot take ownership due to higher borrowing costs, Zlatkin said the first step is to talk to a mortgage broker or another expert.
“If you find out that you will not qualify for your property, potentially look into alternate sources of financing. Maybe you need to go to a fee lender or a private lender. If that's not working, maybe you need to reach out to friends and family to see if they can help you out,” said Zlatkin.
If a buyer determines that they cannot afford the home, Zlatkin said it is time to discuss their options with their lawyer to explore selling the property or getting out of the sale.
“If you can assign the property at that point in time I would start reaching out to a realtor and try to figure out how to actually assign that property to somebody else as long as your lawyer says that you can do it because you're not contractually obligated to finalize the purchase,” Zlatkin said.