Mortgage pre-approvals are always a good idea. If home prices are up or down; if it’s a ‘buyer’s market’ or a ‘seller’s market; and whether you looking for a home in Markham or Richmond Hill houses for sale, being pre-approved for a mortgage offers a number of advantages.
Primarily, when you’re pre-approved, and the right house comes up for sale, you’re ready to close the deal without any delays. Delays that can mean you miss out on the opportunity.
Pre-approval also answers one of the toughest questions there is about buying a home, which is “how much can I afford to pay?”.
If you are thinking of buying a home right now, you might start noticing more mentions of mortgage pre-approvals in the media.
One recent example is a CBC news story titled “Homebuyers rush for mortgage pre-approvals amid mounting signs of rate hikes to come”. News headlines like that can cause homebuyers some concern, so we thought we would take a closer look and explain what’s behind the headline.
The Facts Behind Mortgage Pre-Approval Headlines
As always, try not to be alarmed by news headlines – especially those about real estate. You just need to look at the language of the headline and the first sentence to see why. If they are to be believed, people are ‘rushing’ and ‘scrambling’ to get mortgage pre-approval. In our opinion, that’s an exaggeration of what’s really happening and it’s designed to get you to read the article.
Go Past the Headline for the Reality
After the headline, the language changes to “real estate and mortgage brokers say their clients are increasingly seeking ways to hold on to current rates…”. The fact is that there are signs that mortgage rates may go up. Current rates are at historic lows and are not likely to get any lower. So, it makes sense for anyone looking to buy a home, get pre-approved or renew their mortgage, to lock into current rates.
Reasons Why Rates Might Go Up
First, largely due to the pandemic, consumer prices have started to rise because of the lack of availability of many products. That’s a sign of inflation. If inflation continues, the Bank of Canada might need to raise interest rates to keep it in check. If they do, it will likely, mean increase mortgage rates.
What Will Higher Interest Mean?
Of course, higher mortgage interest rates would mean higher mortgage payments. But how much higher is the real question. Unfortunately, no one can say for sure. However, in the CBC article, Benjamin Tal, a CIBC Capital Markets Analyst is quoted as saying “Current variable rate holders might choose to keep their principal payments untouched and thus will absorb the full impact of higher rates — potentially at the expense of another spending.”
What the CBC Article Doesn’t Tell You
Generally speaking, in the past, mortgage rates and house prices have had a see-saw relationship. Low rates make it less expensive to borrow money. So, more people are able to afford a home, which increases the demand for houses. When demand goes up, so too do house prices.
On the other hand, when interest goes up, it generally means fewer people can afford a home. So, demand goes down. When demand goes down, house prices need to follow to attract buyers.
The historic lows in interest rates we’ve seen in the past 10 years have meant record increases in house prices. If interest rates go up, it might help to at least slow down the increase in house prices. In other words, it may cost more to borrow, but the cost of a home may be somewhat lower.
What Should You Do?
Again, try not to be alarmed by the headlines. Keep yourself informed about what’s happening with interest rates, mortgage rates and home prices. If you are ready to get into the real estate market by getting a pre-approval for a mortgage, one of the best things you can do is talk to an experienced real estate agent with knowledge of the areas in which you would like to buy. The Tar Team can help you find the best rates and get pre-approved for a mortgage. Then we will show you ideal homes in the communities you prefer that all fit your budget.
If this post was helpful, check out our recent article “4 Advantages of a Bungalow-Style Home“.