Written for Daily Hive Urbanized by Jamie Squires, who is the president of Fifth Ave Real Estate Marketing in Surrey.
Navigating today’s real estate market can be a daunting experience as home buyers are faced with a fast-paced, competitive and often frustrating market.
On March 2, 2022, the Bank of Canada raised its benchmark interest rate to 0.5%, an increase of 0.25 percentage points, and a move that is expected to be the first of many small rate hikes throughout the year.
As incoming rate hikes will diminish buying power with every interest rate increase, the largest impact will be felt by first-time home buyers, especially those looking to purchase in sought after markets such as Metro Vancouver.
With additional interest rate increases on the horizon, the time is now for first-time home buyers to start thinking ahead about how they can get into the market and protect themselves against rate hikes in order to get the most out of their purchasing power.
What do rising interest rates mean for first-time homebuyers?
First-time home buyers typically experience greater barriers to entry as they are often young, in the early stages of their career, and have less funds available for a down payment. As a result, rising interest rates will have a greater effect on their debt service ratios compared to seasoned buyers with a higher income and years of savings or equity from homes they bought in previous markets.
While higher interest rates may cause housing prices to decrease or level off, higher rates will also increase the impact of the mortgage stress test, resulting in a much higher cost over the amortization of the mortgage.
Higher interest rates will also increase the cost to build, making it difficult to decrease the price of housing enough to overcome the amount of the increased rate hikes proposed by the Bank of Canada.
Although first-time homebuyers may not have the luxury of equity gains from existing or previously purchased property compared to a seasoned buyer, they will in the long run if they purchase a home today, making it an even greater priority for them to get into the market now.
Protect purchasing power by locking in a rate
With looming rate hikes on the horizon, one of the best ways first-time home buyers can protect their purchasing power is by locking in a rate today. This can be done by checking with lenders to see how long they can get a rate hold for.
It is also important for first-time buyers to ensure they have a mortgage approval, not pre-approval, and that the rate is locked in and held until after the purchase has been completed. Mortgage approval and locked-in rates allow homebuyers to secure their mortgage at the current rate and protect themselves from future rate increases, as long as the mortgage is funded before the deadline in the approval they have.
First-time home buyers should also check if there is an option for a blanket appraisal if they are purchasing at a new development. Similar to a held rate, blanket appraisals allow the purchaser to hold the lower rate for 24 to 36 months until the project is completed, as opposed to a regular approval or pre-approval that would hold the rate for an average of 3 to 6 months.
Blanket appraisals also protect the buyer from losing their initial deposit to the seller. If interest rates increase between putting a deposit down and securing a mortgage, homebuyers run the risk of not completing and losing both their new home and their deposit, which can be very costly.
Homebuyers can secure a blanket appraisal by first inquiring with the seller’s sales team and then connecting with each bank’s representative, ensuring that they will be getting a full mortgage approval with the rate held until or after the outside date in the contract of purchase and sale. By purchasing under a blanket appraisal now, first-time home buyers will not have to worry about the impending rate increases affecting their mortgage in two years or more when it’s time to occupy their new home.
It is the right time to enter the market
As one of the most sought after housing market’s in the country, Metro Vancouver and Fraser Valley continue to see increasing demand from homebuyers. Although rising interest rates may temporarily slow the market, as borders reopen and travel resumes, the demand for these markets is expected to remain strong.
By getting in the market and locking in an interest rate today, first-time homebuyers not only protect themselves against rising rates but also help secure their future by building equity that can be used to leverage purchases further down the line.