Mortgage Rundown: A sinking real estate market requires fast appraisals

Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.

You can’t get a mortgage without an appraisal and in most regions, appraisal values are dropping like a brick.

For homebuyers needing a mortgage, appraisal risk creates anxiety.

When home prices dive, people wonder about things like, what happens if I apply for a mortgage and get my appraisal today, but don’t close for three or four months? Will the lender still honour today’s value if prices nosedive before I close?

Soaring rates or diving home prices: which will affect your mortgage approval more?

After all, the last thing you’d want is to go firm on a purchase agreement and have a lender pull your mortgage approval because the home value plunges.

Some welcomed certainty

Usually, the appraisal is done at time of application, notes Olympia Baldrich, vice-president, real estate secured lending, at Toronto-Dominion Bank. Banks generally honour that appraisal for the duration of a customer’s rate hold, she says. And lenders typically hold (guarantee) mortgage rates for up to 90 to 130 days after you apply.

Having said that, with the national average home value dropping almost 1 per cent a week, time is of the essence when ordering appraisals. That’s especially true if you need a loan for up to 80 per cent of the current property value, the maximum allowed for a conventional mortgage.

“Get the appraisal done the day after you buy a home,” says Shawn Stillman, Mortgage Broker and co-founder of Mortgage Outlet. Ordering an appraisal as soon as possible eliminates the mortgage risk of prices deprecating before closing.

By the way, this is also imperative if you’re refinancing and want the maximum 80 per cent loan-to-value. If you need a $400,000 mortgage on a $500,000 property, for example, and a few panic sales in your neighbourhood push down its value 2 per cent before the appraisal, that lowers the maximum refinance amount to $392,000.

Remember, appraisers base their value estimates on sales of comparable properties. “With so many listings not selling, you just need one neighbour who’s getting divorced to drag down your comparables,” Mr. Stillman notes.

A parting tip: If you have a far-off closing and you’re using a more obscure lender (e.g., a small non-prime lender), be safe. Verify in advance that they won’t reappraise the property or ask for more equity if home values dive before your mortgage closes.

HELOC confusion

Almost four in 10 existing mortgagors (38 per cent) are not sure how a home equity line of credit differs from a mortgage, according to TD’s 2022 Real Estate survey.

But unawareness doesn’t imply risk, the bank notes.

“What gets them is the wording,” says Ms. Baldrich of TD. People believe they have a mortgage when they actually have a HELOC. At many large banks, the majority of conventional mortgages they sell are linked to a HELOC.

“I don’t see a direct link between default rates and understanding the product,” she says. Clearly, with only one in 1,000 HELOC borrowers 90-plus days behind on their payments, there’s virtually no connection between the two.

Slight near-term hope for mortgage rates

The country’s lowest mortgage rates didn’t budge one iota this week.

Some less competitive lenders followed bond yields lower and trimmed their longer-term fixed rates by five to 10 basis points. But so far, that’s it. (There are 100 basis points in a percentage point.)

Canada’s five-year yield dove 55 basis points in the past three weeks as recession fear (normally bearish for rates) overtakes inflation fear (normally bullish for rates). Most competitive lenders are now in a holding pattern, waiting to see what yields do after next Wednesday’s Bank of Canada meeting.

Speaking of the Bank of Canada, the market is pricing in an 85 per cent chance of an oversized 75 basis point rate hike at its July 13 rate meeting. That would take the prime rate to 4.45 per cent, its highest in 14 years.

An escalating prime rate will also stiffen the mortgage stress test. To date, borrowers have been able to qualify for a mortgage using the 5.25 minimum qualifying rate (MQR), if they choose a variable rate.

If the lowest conventional variable rate of 2.9 per cent jumps 75 bps next week to 3.65 per cent, that means its stress test rate will climb to 5.65 per cent. For borrowers on the borderline of getting approved – owing to high debt ratios – this could knock them out of qualifying range, further weighing on home prices.

For that reason, we may see a disproportionate number of fringe borrowers applying for mortgages in the next six days.

Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.