The Greater Toronto/Hamilton real estate markets are shifting and that’s both good and bad news for prospective homebuyers. Here’s what you need to know:
Mortgage Financing Tips
As interest rates have increased, your buying power has decreased.
The amount of money a bank will lend you is based on the amount of payment you can afford (based on your salary, downpayment and interest rates).
Example: You can afford a $2,500 monthly payment
- At a 2% interest rate, you can purchase a property up to $590,000
- At 4% interest, the maximum budget for a property is now $475,000
- At 5%, that budget reduces further to $430,000
- At 6%, that budget is now $390,000
Pro Tip: If you’re waiting for property prices to decrease further before buying, be careful – if interest rates continue to increase (as they are expected to), you may find yourself even farther behind instead of ahead–or even priced out of the market entirely.
Properties in the GTA are actually less affordable now than they were in February.
While average home prices are lower–between February and June 2022, the average price of a detached house in Toronto decreased by more than 16% and the average condo decreased by 6%–the higher interest rates mean it costs more per month now to afford a house than it did in February, when prices were higher.
While interest rates are increasing quickly, it’s important to note that they are still at historical lows – they just aren’t down at pandemic-low levels.
The interest rate used to qualify you for a mortgage isn’t the actual interest rate you’ll pay.
In 2017, the Canadian government introduced a ‘stress test’ – a rule requiring lenders to qualify borrowers at the greater of the benchmark rate or the mortgage rate + 2%, to protect them from rising rates. So be careful if you’re using an online mortgage calculator to determine your budget – it’s always best to talk to a mortgage specialist.
Joe has a 20% downpayment and wants to buy a condo. Because of his big downpayment, he doesn’t need to purchase CMHC insurance and is considered an uninsured buyer.
Joe’s bank will determine how much Joe can afford using a 6.4% rate for a variable mortgage, even though the real rate he’ll pay is 4.4%. If Joe wants to get a fixed-rate mortgage, the bank will qualify him at 7.49% for a 5.49% fixed-rate mortgage.
Pro Tip: You can borrow more money with a variable-rate mortgage than with a fixed-rate mortgage.
As frustrating as the stress test is for homebuyers, it is an important strategy to protect the overall real estate market from interest rate fluctuations.
It’s more important than ever to get pre-approved for a mortgage before you start to hunt for a property.
A pre-approval helps you understand how much you can afford and locks in an interest rate for a certain period of time, usually 90 days. But…and this is important…it’s not a guarantee that you’ll get financing or that you’ll be able to afford that much mortgage if interest rates go up during your pre-approval period. Make sure to read the fine print! Most variable-rate pre-approvals are only stress-tested on the date of purchase, not the date of the pre-approval – so your budget may be lower than you think it is if interest rates increase.
Pro Tip: If you got your pre-approval more than 30 days ago, make sure to check in with your bank or mortgage broker to have it updated. And when you do make an offer on a property, make it conditional on financing so that your lender can fully approve it.
What to Expect When Househunting
While financing is more complicated (and expensive) in this shifting market, there’s good news when it comes to househunting.
There are more homes for sale.
After years of low inventory and slim pickings for sale, today’s buyers have more choices. While you’ll probably still have to compromise on some things, you’ll have more condos and houses to view and more options. Yay!
Prices have decreased from their pandemic highs.
During the pandemic, the average home price in the GTA increased 27% between February 2021 and February 2022. Crazy! And obviously, not sustainable. Since March 2022, prices have been coming down to more normal levels as the overheated market re-balances. It’s almost like we borrowed price growth from the future during the pandemic, and now it’s time to pay it back.
In the words of one of our favourite mortgage brokers, Elan Weintraub: “Purchase prices are forever; rates are temporary.” While interest rates are on the rise, they will almost certainly come down once inflation is under control. Buyers who capitalize on today’s lower prices may see a great benefit in the long term.
Homes are taking longer to sell, so there’s (a bit) more time to make a decision.
At the height of the crazy Toronto market, buyers rushed to see newly listed homes – they were literally selling within hours. With homes taking longer to sell now, there’s more time to decide and more time to explore the neighbourhood.
Pro Tip: Prime homes in prime locations are still popular and may get multiple offers, so if you’re in love and have found ‘the one’, it’s still worth it to move quickly.
It’s an excellent time to upgrade to a bigger home.
If you already own a home and are upgrading to a bigger one, you’ll benefit from decreasing prices. If your $900,000 home has decreased in price by 10%, so has the $1,300,000 home you want to buy, giving you a $40K bonus. That differential is an important consideration.
You’ll likely be able to port your current mortgage to the new property, so you’ll only feel the impact of higher interest rates on the amount of new mortgage you need (at least until it’s time to renew!)
There are some very motivated sellers out there right now – and some distressed sellers too.
While most sellers are still expecting market value prices (the ‘new’ market values), there are some people who NEED to sell, at any price. While it might seem opportunistic, distressed sellers will appreciate an offer vs. no offer.
You need to think longer-term.
That’s not actually new advice – we’ve been saying this for the last 15 years. If you’re buying a home, plan to be in it for at least 3-5 years. Market fluctuations only matter if you need to sell.
Again, we have some good news: buyers are more in control now than they have been for years. That means:
You finally get to negotiate!
Most homes are not getting multiple offers right now, so you’ll be able to negotiate. There are some very motivated sellers whose homes are listed for sale and you might be able to score a deal – and it’s been a loooong time since we’ve seen that in Toronto.
While some negotiations happen over hours, it’s not uncommon to see buyers and sellers negotiate back and forth over several days or more. The further apart you are on price, the longer the negotiation takes.
With buyers more in control, there’s more opportunity to negotiate terms that are in your favour: closing dates, inclusions (for example, you might be able to ask the seller to include the chandelier, the bbq or the big-screen TV) and conditions.
Pro Tip: Toronto REALTORS haven’t used their negotiation skills for a long time, so make sure to hire an experienced REALTOR who is a Certified Negotiation Expert (every BREL agent is certified).
Conditions are Back!
Home inspection and financing conditions are the norms these days, so you’ll have more time to do your due diligence, get your own home inspection and ensure your financing is 100% in order. You can read more about these here: The Financing Condition: What You Need to Know and Top 10 Things to Know About Home Inspections.
While not common, we have seen a few offers that are conditional on the buyer selling their own home. That condition comes at a price – the seller will certainly want a higher price to take on that risk – but in some cases, it makes sense. You can read more about that here: Everything You Need To Know About The Sale of Property Condition.
There’s more to think about when buying a home during a shifting market, but it can be a great opportunity if you approach it with clear goals, up-to-the-minute information and the right REALTOR by your side. Want to chat? You can reach us here.