Many buyers are facing rate shock as closing nears
The interest rate spike witnessed in recent years is causing plenty of headaches in the preconstruction market, with many borrowers seeing their costs surge when it comes to closing time.
Nicolas Vimard, a mortgage broker with Easy House Loan, told Canadian Mortgage Professional he was seeing plenty of instances of borrowers facing an unwelcome surprise at the beginning of their closing window.
“Many people that purchased preconstruction condos and houses were qualified at 2% or 3%. Now when it comes down to them receiving those 60 days’ notice for closing and they go to the lender – the bank – they realize that the rate they were given would only last for six months,” he said.
“And now they have to qualify at 5% or 6%, and they don’t qualify – either because of income or because of the rate being much higher than initially.”
In those cases, the builder ultimately keeps the deposit but still needs to resell the property to avoid being stuck with an excess of inventory. Vimard said with little prospect of an imminent drop in interest rates, prices remaining high, and affordability increasingly squeezed, that trend showed no sign of slowing.
Investors increasingly important in preconstruction market
Top of mind for Vimard in that climate has been communicating with investors who might be able to take the property off builders’ hands. “For investors, maybe there’ll be opportunities there where builders are going to be more inclined to have a price revision or negotiate on pricing in order to liquidate the inventory,” he said.
“I’ve approached a few builders when it comes down to closing and their purchasers are having difficulties closing a deal. Then they share my contact – and what I do is look for alternatives for them. It could be an investor with other properties, and they have a good amount of equity in their properties. We can help them out to use some equity to raise the necessary funds and close the deal.”
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How can brokers work with those affected by preconstruction problems?
Every situation is different, although it’s always in builders’ interests to find a quick and effective solution. That often means they need to reduce prices in order to move the product, Vimard said, even if it’s not an option many are happy with.
“Typically builders are reluctant to reduce the prices because it will impact the market value of their book – so what they will do is add parking or a storage unit,” he said. “It’s not helping either because if the price goes down, then it’s just everyone in the building being hurt.
“The people that were first in line to purchase are still sitting on a fair amount of equity, but people that were a little bit late to the party, those are the ones that are being the most affected.”
A small but growing number of borrowers, meanwhile, are facing foreclosure – with the fading possibility of rate cuts in June only adding to those Canadians’ woes. “The first ones to go are always the weaker borrowers,” Vimard said, “but as this persists, there are going to be people that we thought were going to be stronger, but their savings are vanishing.”
Options for impacted borrowers depend on the equity in the property. If a borrower is behind but has decent equity, Vimard said a private mortgage solution is possible, even if just as a temporary fix.
Without more income, though, and a plan to cover monthly expenses, borrowers are usually left with no option but to sell.
“We’ll give them enough time to retake possession of the property, put it for sale and move on – downsize,” Vimard said. “But every situation is totally different. So there’s just not one scenario that fits all – it’s dependent on the location of the property.”
For brokers, full due diligence – and avoiding unrealistic or unfeasible solutions – should be top considerations when dealing with those client types.
“Sadly, sometimes they also deal with brokers that are inexperienced and the brokers promise them the world, ask for upfront fees, and then don’t get it done,” Vimard said. “If they’re five days away from being evicted when I need an appraisal, when I need to assess a deal and we’re getting towards month-end, five business days is not a lot of time to prevent foreclosing.”
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