Mortgage hikes are coming and theres a surge of buyers eager to get pre-approved before they do

Canadians are scrambling to get mortgage pre-approvals and rate holds before the era of low interest rates comes to an end, as some economists predict.

Real estate and mortgage brokers say their clients are increasingly seeking ways to hold on to current rates because many housing markets like Toronto are facing heated conditions that make it hard to keep purchase prices down.

"It's a seller's market and you barely have the opportunity to put conditions (on a purchase) because there are 400,000 people waiting for their permanent residency, 200,000 of them are already here and there's buyers lined up around the corners," said Estee Zacks, the Toronto-based owner of Strategic Mortgage Solutions Inc.

"They feel weak, and they are statistically, so they're just trying to get a leg up as much as they can."

Booming demand

Zacks has noticed a recent surge in prospective buyers requesting rate holds from lenders. Rate holds freeze mortgage rates for up to 130 days.

Mortgage rates vary across banks, but Ratehub.ca shows the country's top five banks are offering five-year fixed mortgages for as low as 2.62 per cent and as high as 2.94 per cent.

Three-year fixed mortgages range from 2.49 to 3.49 per cent, while five-year variable mortgages vary between 1.40 and 1.75 per cent.

The interest rate, which also weighs on homebuyers, has sat at 0.25 per cent since March 2020, but the Bank of Canada has hinted it could rise as the country continues to climb out of the pandemic and loosen restrictions.

A rise in both mortgage and interest rates would end an almost two-year period of rock-bottom borrowing costs. However, the low rates haven't done much to take the bite out of housing costs.

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The Canadian Real Estate Association said the national average home price was $686,650 in September, up 13.9 per cent from $602,657 last year.

In Toronto, it was even higher. The Toronto Real Estate Board said the average price of a home sold soared by almost 20 per cent to nearly $1.2 million in October, up from $968,535 in the same month last year.

Rates hikes will make those purchases even more costly.

Tiny hikes add up fast

A one per cent increase in mortgage rates from current levels will cost an average new buyer $230 or 12 per cent more in additional monthly interest payments, CIBC Capital Markets analyst Benjamin Tal wrote in a Nov. 4 note to investors.

"Potential buyers will face a higher interest payment trajectory, leading to reduced demand for new and existing units, potentially resulting in some slowing in the important construction industry," he wrote.

"Current variable rate holders might choose to keep their principal payments untouched and thus will absorb the full impact of higher rates â€" potentially at the expense of other spending."

If rates stay elevated into 2025, he noted that "the massive borrowing undertaken during the pandemic will feel the full bite of higher rates."

Vancouver real estate broker Tirajeh Mazaheri said buyers have noticed this and are rushing to get pre-approved for a mortgage to extend any kind of relief they can.

House prices have been on a tear during the pandemic, as low rates have encouraged people to buy more house while they can. (Ron Antonelli/Bloomberg) 'People are scared'

Many, she said, spent much of the pandemic closely watching housing prices and hoping they'd decrease, but have now accepted that likely won't happen.

"People are scared and they are saying if interest rates go up, they'll never be able to afford the city," she said.

"What we're seeing is a lot of people trying to take advantage of pre-approvals right now or trying to get approved, so they can get their hands on something and not miss out on low rates."

BMO Capital Markets senior economist Robert Kavcic doesn't think those people have long.

He believes the Bank of Canada will likely hike its rates quicker and by more than most people expect, and he's already seeing signs of rising mortgage rates.

In a Nov. 3 note to investors he wrote, "Mortgage rates are already creeping higher in the five-year fixed space, but those with contracts in hand probably have another month or two to buy something."

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