This past Tuesday, the Bank of Canada announced that the prime lending rate would not be changed, although they hinted at an increase in July.
It’s not like the government would ever lie, right?
Change or no change, I have to stress: get a mortgage pre-approval!
I’m not a mortgage broker, and thus my knowledge of the mortgage market and the inner-workings of the system isn’t quite up to par.
But I would, however, give myself a solid B+ grade for somebody who isn’t in the business, and thus I’ll put forth a brief explanation on how the prime lending rate affects the housing market.
There is a common misconception that the prime rate is tied to mortgage rates.
This is entirely incorrect.
The prime rate can indirectly impact mortgage rates, but they are not tied together.
Many people were waiting around on Tuesday for the announcement from the Bank of Canada as they assumed that a raise in the prime lending rate would in turn raise the mortgage rates, and thus their ability to buy real estate might be affected.
A raise in prime could affect mortgage rates, but not necessarily, and not immediately.
The mortgage market is based entirely upon the bond market, and the bond market is impacted by many things.
For example, there is an interesting relationship between the stock market and the bond market. If the stock market is hot and people are making money, they might not seek out the bond market as an investment vehicle.
When the bond yield rises, so too does the five-year-fixed mortgage rate.
This is the relationship we are interested in!
So if the prime lending rate is raised from 2.25% to 2.50%, will the five-year-fixed rate mortgages jump from (approx) 3.69% to 3.94%?
No, they won’t.
But in time, if the bond yields rise, then so too will the mortgage rates.
The first thing I tell my clients, assuming they become clients after I first meet a person interested in buying real estate, is “Go and get a mortgage pre-approval.”
I’ve asked the rhetorical question before: “How can you know what to look at when you don’t know how much you can afford?” The mortgage pre-approval will tell you which doors to enter.
But as we move into the Spring, getting a mortgage pre-approval is even more important for another reason: locking in the rate.
My mortgage broker will lock in an interest rate for 120 days after doing a mortgage pre-approval. So if the Bank of Canada did raise rates 50 basis points, and the shakeout from the financial markets did impact mortgage rates, a buyer who was pre-approved before it all went down would get to keep the lower rate!
So the question becomes, why not get pre-approved?
Lock in that 3.69% rate, and if rates jump to 4.09% by the time you’re ready to buy, you’ve already got the lower rate tucked away!
Allow me to plug my mortgage broker, for a moment…
I have done about 50-60 deals in the past six years with my mortgage broker, Joe Sammut.
Joe is a sexy dude, with an amazing phone voice, but he’s also the best broker in the business. I tell my clients quite simply, “If Joe can’t do it, it can’t be done.” And it’s nice to know that if Joe says, “Sorry David – I can’t get him ABC,” then I’m absolutely certain that my client can’t get ABC from anywhere.
Joe Sammut is in no way affiliated with Bosley Real Estate, but I refer him ALL my business. I don’t get any referral fees, partly because I don’t believe in them, since they represent a conflict of interest. I would like to be invited up to Joe’s farm in Bolton this summer to play golf, but I’ll just keep waiting on that one…..won’t I, Joe….
Joe is always ahead of the curve, and knows about changes to the mortgage industry before they even happen.
But there are two things you will get from Joe that you won’t get from your bank:
1. A better rate
2. Better service
You might ask, “Who cares about service? I only care about the rate.”
If you’re a first-time buyer who knows nothing about anything, you need somebody at the top of the mortgage game to guide you through the process. The one thing I do get from Joe, on account of referring him so much business, is he gives my clients more attention.
Mortgage brokers often use FIFTY different lending institutions, and Joe is no different.
Who has a better chance at getting the best rate: your one bank, or Joe’s fifty lending institutions?
This past week, my client named Tom who works for Scotia had a nightmare trying to get a mortgage pre-approval. We were set to offer on a property in Liberty Village but we had yet to get a mortgage pre-approval from Scotia – the very company that Tom worked for!
In fact, Scotia had been jerking Tom around for the better part of three weeks!
Tom went to his Dad’s private banker (who shall remain nameless) and this other bank couldn’t get Tom approved in the space of five days.
Joe Sammut gets my clients approved overnight.
Tom and I had no choice but to submit our offer conditional on financing, and in the end, the seller refused to look at any conditional offers. She was out in Vancouver and she wanted a FIRM deal that very night.
Our offer was very competitive and was actually for the most money, but the seller passed.
Tom and I both knew that we should have got the mortgage pre-approval taken care of way, way earlier…
If we had the mortgage pre-approval in place, and we made an unconditional offer, we would have got the property.
Thankfully, Tom wasn’t fussed about this property at all. In fact, we’re already looking at a couple of other options; some similar, some very different.
But imagine losing out on “the dream home” because either you didn’t get your mortgage pre-approval taken care of, or because your bank was too slow off the draw.
I know for a fact that banks are insisting that buyers include the condition on financing in their offers, even if they’re pre-approved! The audacity!
Banks want what they want; even if it jeopardizes the potential purchase. If a buyer is a pre-approved, there is no reason for a bank to insist on the financing condition. But they do it anyways, to cover their end, for reasons such as “What if the condo was used as a marijuana grow-op?”
I welcome your thoughts on the “broker versus bank” equation, but you all know where I stand.
I know many of you see it the other way around, and believe me, I’d love to hear arguments pro-bank.
In the meantime, consider using my mortgage broker for your next transaction.
I’ll let you know if he ever takes me golfing….
Joe Sammut
Mortgage Architects
1-888-575-4403 ext 21
joesammut@mortgagegate.ca
earth mother
at 9:57 am
Hi Dave — as for mortgages rates, what about splitting half locked and half variable?? I heard this for the first time on a tv commercial.. which I usually tune out….
Meh
at 12:05 pm
Please correct me if I’m wrong, but a pre-approval isn’t a binding contract. Right?
So lets say you are preapproved and make an unconditional offer on a house, you win.
The next day you lose your job. The bank isn’t going to follow through and give you the loan and you’ll be stuck with a 400K bill coming up with no way to finance it.
Or the banks may decide the next day to start assessing the price of the house themselves to keep from giving a mortgage for more than they can safely say the house is worth, as they are doing in the US now. If it assess the house at 375K, you *have* to find another 25K or you are in big trouble.
So going in without a financing clause is gambling with a huge amount of money. If *anything* goes wrong, you risk bankruptcy.
Am I wrong?
JG
at 1:09 pm
From an insider at a bank – let me just put that out there.
I’ve been in the industry for 5+ years now, and this is my view.
If your description of Joe Sammut is true, than for every Joe Sammut’s there are 100’s of cheats, liars, and deviants! But this is also true for in-house mort reps at banks – although slight less due to more stringent regulations within the banks.
Its my opinion, rates are rates. For the most part – broker vs banks – the client will eventually get the rate they are looking for. I rarely lose deals to rate issues. And if I do, then it’s to a company such as Cdn Tire mortgages, which has gone belly up a year ago. Sold their portfolio to another comapany. Needless to say, its not always the rate – and if a client is persitant to go with the likes of Cdn Tire or a small private lender than its the clients risk.
At the end of the day – for me, its service. Period! Its about being honest, having integrity, the ability to understand the clients needs, and guiding those new buyers in the right direction.
There are too many horror stories of clients being taken advantage of.
If you can find someone who holds those qualities, then stick with them – whether bank rep or mort broker.
As for the point or rep’ing one lender vs 50 – obviously the one who rep’s 50 lenders has a better chance at getting the finance approved. But if the broker is a crook, steers you in the wrong direction, and costs you thousands of dollars – would you have not preferred to stick with the honest lender at the bank even with a 10bps higher rate?
-i am sure they would.
David Fleming
at 2:04 pm
@ JG
Joel, I was hoping you would pipe in! I remember a couple of years ago when you wrote that lengthy retort on my “MORTGAGE” section (it’s still there now). I’m glad you were able to provide readers with the other side of the equation.
Smith
at 2:05 pm
Most brokers give out referral fees. I think your missing out on a few hundred bucks everytime you refer this guy a deal. Its common place in the industry.
JG
at 2:58 pm
@ David.
Thats hilarious you remembered that –
@ Pre-approvals:
At the end of the day pre-approvals are nothing but rate holds. I understand builders and real estate agents request them from clients. It shows real estate agents the buyer is serious, as well as a strong indication of what they qualify for. For builders, its a requirement usually to complete the purchase.
Yet, since pre-approvals are not formally underwriten, meaning: underwriters do not confirm income, do not confirm marketability of property, and other aspects of approving an application- the pre-approval does not hold any weight into actually being approved for the actual mortgage. Case in point – some banks do not even check credit scores!
So the guy who just crawled out from under a rock, states to the bank they work for xyz company as the CEO for $500,000/yr – he walks out with a pre-approval for a $2,000,000 mortgage. When time comes to actually get the funds to make the purcahse, the truth is found out and he’s declined.
Now obviously there is certain risk a buyer takes upon themselves when waiving a financing clause – and i do understand the very competitive nature the real estate industry is in right now – but it still puts the buyer in a risky situation when all they have in hand is a ‘rate hold’.
If you truly do not receive a referral fee – i commend you. The indsutry has run amock with all the backhanders out there – and severe conflict of interest. Its bad enough I get real estate agents on the phone harping at me about why the deal is having difficulty going through, when they love to throw in the line – ‘if you can’t do it, i have someone who can’ – yeah, of course! i bet they have a rolodex of ‘someone who can’.
Are they just concerned for the client, or just their own commission on the deal and on the look out for more compensation!?
David Fleming
at 4:08 pm
@ JG
I don’t believe in referral fees.
I make money selling real estate, and I NEED a good relationship with a dependable mortgage broker. I have that with Joe Sammut.
That is worth more to me than a few hundred bucks per transaction from some other mortgage broker.
I need to know that my broker is working full-speed on getting my clients approved. That’s all that matters to me.
IanC
at 6:54 am
This comment is not so much about pre-qualifying, but my experience about “removing financial conditions”.
I am not a financial expert – just a customer.
I have bought one home (a condo), making offers on two different properties. I did remove financing on both, – but not until the lender appraised the property – it only took a few hours. They just needed the mls.net info. The lender also claimed to be able to access the health of the status certificate of many larger buildings in Toronto in some database. That would be part of the appraisal – I would assume.
It may not be a 100% guarantee (there must be fine print), but if they can do appraisals quickly, I feel better (as a property novice) having the lender appraise and tell you to remove the financing condition. Still, the risk is still on your shoulders, not theirs – not until the lender provides the cash to buy “their” property. And having a bit of extra cash and not bidding to your absolute maximum also gives you some wiggle room if the lender decides to give you less for whatever reason they chose.
If the lender does not give you the money when it comes time to pay, you either have to find money elsewhere or lose your deposit. You are still not off the hook if the seller makes a claim higher than your deposit (see vancouver pre-sales in recent years!).
That said – get preapproved. And if you cannot close a deal by the time the rate guarantee would expire: wash, rinse, and repeat.
George
at 11:09 am
IanC, I believe that is a smart way of reducing your risk in the purchase. Do a lot of lenders appraise properties in that same manner? In the current Toronto market where list prices are often below sale prices, appraising a property must be more challenging.
It seems like the buyer, if he or she excludes any financing conditions in their offer, is still subject to the risk of receiving an appraisal below cost. I guess the buyer could always try another lender/appraiser afterward, while the seller celebrates a relatively risk-free transaction.
Tom
at 11:57 pm
Pre-Approvals are just used to give the buyer a ballpark figure of what he might be able to afford. The process doesn’t get serious until the deal goes “live” and there is an actual address of a property. Depending on the buyers situation the rate he is quoted then should be quite a bit lower.