# Timing for pre-approved mortgage



## Y&T2010 (Dec 29, 2009)

Hi all!

Just wanted some feedback and opinions:

I am aware that there changes pending for April 19, 2010 for mortgage rules, as well, am aware of the recent mortgage rates hike by TD bank and Royal Bank two days ago.

I am thinking that now would be a good time to get a preapproved mortgage for 120 days- with a variable mortgage.

I was banking on this time- before April 19 so I can be approved for more, and I can wait out a bit longer until the housing bubble pops a bit- forecasting 2 months into the interest rate hikes. That would put my 120 days into mid-July.

Do you think I should have gotten a preapproved mortgage in March instead? That would put me into mid-June with the end of the interest rate guarantee.

What do you think?


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## w0nger (Mar 15, 2010)

there are some banks out there that will pre-approve you up to 365 days... TD did a rate hold for me for year at 3.79% 5-year fixed.


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## Berubeland (Sep 6, 2009)

Saw this posted at Million Dollar Journey

http://www.milliondollarjourney.com/

Seems like a pretty good rate I have no idea how long they would hold it for.


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## Y&T2010 (Dec 29, 2009)

Thanks, guys!

I didn't know about the 1 year hold- that's pretty darn good. Do you know if the big banks do this? I assume it's a one year hold provided you have a preapproval in place.

Just checked out the MDJ post too.
Prime -o.6% is pretty darn awesome! Thanks!!


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## Y&T2010 (Dec 29, 2009)

Oh just noted that the MDJ referral for the Prime -0.6% is only for purchases and isn't applicable for preapproved mortgages.


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## Potato (Apr 3, 2009)

Y&T2010 said:


> I am thinking that now would be a good time to get a preapproved mortgage for 120 days- with a variable mortgage.
> 
> [...]
> 
> I can wait out a bit longer until the housing bubble pops a bit-



There's a very strange dissonance here -- if you think there's a housing bubble, why plan to buy in the next 120 days?


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## Berubeland (Sep 6, 2009)

Potato said:


> There's a very strange dissonance here -- if you think there's a housing bubble, why plan to buy in the next 120 days?


Some people think the housing market is going to slow down after the changes come through April 19th. I keep hearing that inventory in Toronto is very low and prices are going up this summer. 

Myself - sitting on the fence


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## Four Pillars (Apr 5, 2009)

Y&T, it's too late to worry about whether you should have gotten the pre-approval in March. 

If I'm not mistaken it doesn't cost anything to get a pre-approval and you can always get new ones so why not get it now? If the something changes in the next few months (ie rates drop?) you can get the amount changed or apply for a new pre-approval. 

You can get a new pre-approval every month if you want.


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## Y&T2010 (Dec 29, 2009)

Berubeland said:


> Some people think the housing market is going to slow down after the changes come through April 19th. I keep hearing that inventory in Toronto is very low and prices are going up this summer.
> 
> Myself - sitting on the fence


Berubeland, this was what I was hoping for myself (that the changes will slow the market down come April 19) and was hoping to take advantage of this.

I'm thinking that there is a bubble now, and in a few months time, it will dissipate.

Thanks for all your feedback.


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## Potato (Apr 3, 2009)

Y&T2010 said:


> I'm thinking that there is a bubble now, and in a few months time, it will dissipate.



Hey, I fully believe there's a bubble, and am waiting it out myself... I also think the recent fixed-rate increases plus the CMHC changes this month likely will mark the beginning of the correction. However, I fear you'll be disappointed if you think the situation will resolve itself in 4 months. The US has many more accelerating factors than we do, and they're 4 *years* into their correction.

There's no harm in getting a rate hold and waiting-and-seeing, but I would caution patience.


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## Berubeland (Sep 6, 2009)

I'm thinking that there is a bubble now, and in a few months time, it will dissipate

It's not like bubble you blow in the springtime... when the bubble bursts it affects everyone, causes recessions, blows up the economy and causes unemployment etc. 

We have at this time is an affordability gap, the average house sells for more than the average couple working full time. This is not sustainable over time. 

I forget the exact number but I believe the difference is about $20,000. The average family would have to make $20,000 more per year to qualify for the average house. That is significant.


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## Four Pillars (Apr 5, 2009)

Berubeland said:


> I'm thinking that there is a bubble now, and in a few months time, it will dissipate
> 
> It's not like bubble you blow in the springtime... when the bubble bursts it affects everyone, causes recessions, blows up the economy and causes unemployment etc.
> 
> ...


The scenario you are talking about is for first home buyers correct? Ie a couple has 25% down payment so their mortgage is for 75% of the average house cost so they need $X to support that which is $20k over the national average?

I don't see why this is going to cause a big crash. Yes, first time home buyers help support demand for houses but most houses are not for sale. 

That statistic makes it sound like the average Canadian can't afford a house which clearly isn't the case because there are a lot of Canadian home owners who can afford their house.

Yes, I can see how this will reduce demand and prices may fall a bit eventually but I just don't see the big crash. Or if it does happen, it won't be for that reason.


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## Berubeland (Sep 6, 2009)

I wish it was for first time buyers but it isn't. 

It is a statistically important number and an indicator that the price of houses is currently not sustainable. This does not mean that there is going to be an immediate correction. 

The average person should be able to qualify to buy the average house. 

Let me give you an example that is similar using the car market. Let's say for example that all the cheaper car makers put up their prices to match Mercedes prices. So the average working couple in Canada cannot afford a car at the new Mercedes price. What will happen to the price of cars? Who buys more cars? The guy who can afford the Mercedes already or the rest of the population ? Would you say that this is a sustainable market? 

So this exact scenario is repeated in the housing market. It doesn't mean that the average person cannot decide to buy something cheaper thereby finding a house for himself. Or that this house will not be affordable for them and they will default. Or that the market will collapse with catastrophic results. All it means is that the market is not in a natural state of balance. Something else may happen. For instance wages may go up, or the market may just cruise along at the same prices until the gap decreases.

At one point if the gap increases the average working couple will be unable to buy a house at all and then we will have a collapse. 

Now I am not talking about the rest of Canada but rather Toronto and Vancouver.


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## Four Pillars (Apr 5, 2009)

I disagree.

In your analogy you are using a rapidly depreciating asset that doesn't last very long.

If that pricing scenario occurred and cars could last 100 years then used cars would all of a sudden be worth a lot more which would mean that a current car owner could sell their used Chevy for a decent price which would make the Chevy or Mercedes much more affordable than before.

In the housing market you have a large segment of the population that has a big chunk of equity in their house. Their affordability to buy a new house is related to their income and the amount of equity they have. While they might have an average income, if their house equity is large enough then they could afford an above average house.

The other thing with "average family income". This includes all families in Canada regardless of how low their income is. Not all families own houses. I would suggest that if you look at average family income of families that own a home - that is the more relevant average.

Even if you could somehow do that analysis and go back 20 years when housing was supposedly "affordable", I think you will find that the "average home owner" has a significantly higher income than the "average family". There have always been a lot of people who couldn't afford homes and including them in the numbers only serves to make the unaffordability problem worse than it actually is.


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## Berubeland (Sep 6, 2009)

I attended a conference where an analyst from CMHC was the speaker. This is their research in the GTA. They used average family incomes from the Toronto and average home prices from the Toronto area. They have been tracking this statistic for many many years. 

The conference I attended was based in part on this CMHC research talking about the rental industry in particular and how this gap is great for us as more people rent when they can't afford houses. As an aside it was discussed that this affordability gap is not a good sign for the buying/selling market. It indicates that there is a significant problem. 

Why exactly do you think these new measures coming April 19th are being put into place? 

It's because the housing market is unsustainable and demand needs to slow and this gap needs to disappear. They didn't do this because they felt like it would be popular. They did it because for once they listened to the smart guys with lots of degrees who look at these statistics and draw conclusions. They did it in spite of the fact that we are in recovery from a significant recession and out major trading partner is still in the dumps. 

We have been overdue for a correction in the Vancouver and Toronto housing markets for quite a long time. Usually the markets correct every 10 years or so and Toronto has been 20+ years now without a major correction. 

As for your aforementioned equity... when there is a correction it disappears. 

The point I was making is there is no market without buyers. The prices plummet until people start to buy. In a bad market this can be a long freeking time as people panic and wait for the bottom. I can tell you this, last winter we came perilously close to having our correction. I had several phone calls per day from people who couldn't sell their house and were trying to rent them out. These were houses on the market for over 90 days.

I can assure you that when this happens people will not be moving on up either. They won't be rejoicing in the low prices as their own house equity drops. They won't be buying because they will be busy being terrified. Just like during the stock market crash, everyone was scared to buy. 

This year... inventory levels in Toronto are at an all time low. This means more competition and higher prices. But... interest rates are at an all time low once they bump up a point or two... prices will go down. So I don't know what the hell is going to happen. 

Believe it or not I am not a bear on the real estate market. I do think it is a time for caution. The indicators are there for a correction. Fortunately our government has taken some measures to slow down the real estate market. 

Another troubling statistic is the rent/buy ratio. Currently it is extremely difficult in Toronto to buy a house and rent it out and even break even. This is another indicator that is used to indicate that a market is overpriced. A balanced market will allow an investor to buy a residential property with a 20% downpayment and rent this home out and make a small profit. 

To make an analogy with the stock market. Is the time to buy gold stocks when the price of gold is at a 20 year high or is it time to stay the hell away? Personally when I see things like "gold at 20 year high" I go look for the next investment.


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## andrewf (Mar 1, 2010)

Seems to me a theme over the next decade will likely to be downward pressure on prices as boomers downsize to their retirement homes. Many boomers haven't saved enough, and have essentially counted on their home to be their retirement plan. Problem is, that requires them to move to more modest accommodation (or to a smaller town outside the GTA) to release some of the equity. I don't expect this to cause a crash in itself (but affordability might do just that), but I do this this will weigh on prices, and likely keep price increases modest to flat.


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## Four Pillars (Apr 5, 2009)

Berubeland - I don't disagree with that post. I do think there is a good possibility of a correction. However, I think the main reasons for it will be interest rates and possibly higher unemployment (if that were to happen). 

Andrew - this is about as anecdotal as it gets, but I don't know very many people who have done the stereotypical "downsize" in retirement. My Mother-in-law did it 4 years ago (at age 76) but in her case she only "downed" in size - the price was the same.

I think of my parents and their friends (around age 70) and as far as I know - none of them have moved into a cheaper retirement residence (not counting the odd one that now resides in a cemetary).

Does anyone have any stats on this? How many people sell their house within a couple of years of retirement. And do they buy something cheaper (which would result in less overall demand)? or just different (ie no stairs)?


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## cardhu (May 26, 2009)

While the stat Berubeland is quoting may be a useful general indicator (hard to say whether it is or not, based only on its value at a single point in time ... some sort of historical context would be necessary to make that judgement), FP is correct that that only translates to “affordability” for first-time buyers ... and not every home-buyer is a first-time buyer ... for someone selling a $900K home to move into a $1.3M home, the ratio of the selling price to their household income is irrelevant ... for someone moving from one neighborhood to another, within the same price range, the ratio of selling price to their household income is irrelevant ... for someone downsizing after the kids move out, the ratio of selling price to household income is irrelevant. 

I don’t know how many transactions represent first-time buyers, but I would guess that its far lower than half ... if (for example) only 1 out of every 10 transactions involves a first-time buyer, then the “unaffordability” reflected by that statistic should have negligible effect on real estate prices, overall. 

Home prices may very well decline, but that particular relationship won’t necessarily be the cause.


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## Potato (Apr 3, 2009)

cardhu said:


> While the stat Berubeland is quoting may be a useful general indicator [...] FP is correct that that only translates to “affordability” for first-time buyers ... and not every home-buyer is a first-time buyer ... for someone selling a $900K home to move into a $1.3M home, the ratio of the selling price to their household income is irrelevant ...



I will disagree here: it affects anyone that buys with a substantial mortgage, whether that's a first-time buyer, or a move-up buyer who's using the equity from their first home as the downpayment on the next. If you have to pay for your house out of your future income, then it matters what your house value (or more properly, mortgage principal) is to your income. True, no one actually sits down and calculates that out and bases a purchasing decision on the result, and the resulting market forces are not directly tied to that measure, but in aggregate it is a statistic that's worth looking at. 

Secondly, there are several metrics that tell us the housing market is broken at the moment (my favourite is price-to-rent, since you have to live somewhere). I wouldn't put too much faith in any one on its own, but with the exception of the ones that are interest-rate sensitive, they're all painting the same picture: either low rates are here to stay, or Toronto is over-priced, by roughly 30%. I personally don't believe that low rates are here to stay.


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## cardhu (May 26, 2009)

Potato said:


> it matters what your house value (or more properly, mortgage principal) is to your income.


No ... it is incorrect to equate house value and mortgage amount ... they are not the same thing ... borrowing $400k is borrowing $400k, regardless of whether you’re using that amount to buy a $500k home, or a $1.3million home... the ability to carry that debt, on a particular household income, is not impacted by the selling price of the property. 

House value and mortgage amount may converge in some cases, notably among first-time home buyers, which is why such a stat only translates into “affordability” in such cases ... for most of the rest of the population, it doesn’t.


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## andrewf (Mar 1, 2010)

Let's say you take the market price of your home and apply the going mortgage rate to that amount. If this value+ownership costs (property tax, maintenance, insurance, etc.) represents a large percentage of your income, I'd say you're house poor, even if you have no mortgage. You're giving up something like that in implied rent by living in that property rather than selling it and investing the proceeds and living somewhere cheaper.


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## cardhu (May 26, 2009)

By that definition, owning a home outright would be "unaffordable" for many people ... retired people for example ... that's an inherently silly notion. 

I understand what you're getting at ... equity sitting idle and all that ... but not everyone chooses to live in the smallest apartment they can find, while renting out their comfortable house for big bucks ... affordability has nothing to do with it.


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## Soils4Peace (Mar 14, 2010)

I own my house outright, in a desirable area, but have no job. Even with a job like I had the last ten years, I could not afford to pay a mortgage half as large as I could sell this house for. Strange situation to be in, but I am sure glad it is paid off.


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## laura (Apr 19, 2010)

w0nger said:


> there are some banks out there that will pre-approve you up to 365 days... TD did a rate hold for me for year at 3.79% 5-year fixed.


Hi W0onger,

How did you get them to extend your rate for a full year? 

I got preapproved in late February/early March with TD as well. They gave me 3.88% for a 5 year fixed. I bought a house at the end of March, so I locked into this rate. However, closing isn't until end of November. My TD mortgage broker told me that they can only hold the rates for 120 days, therefore I have to renew my rate in July so that it can be carried into November.

This whole process is starting to stress me out a bit since mortgage rates are going up, who knows what they will be at end of July.

Do you have any advice as to how I can get TD to extend my rate for a year as well?

Much appreciated!


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