17 Jul

RISING INTEREST RATES AND THE IMPACT ON REAL ESTATE VALUES

General

Posted by: Brad Lockey

Rising Interest Rates and the Impact on Real Estate Values. Is there a direct connection? In a post entitled Interest Rates and Property Values. What’s the Connection?, I suggested that there was. An example was given which suggested that mortgage lenders would be directly impacted by a rise in rates, as their underwriting parameters, most notably debt service coverage requirements, are directly impacted. An inability for a buyer to secure the required financing amount, in an environment of increasing interest rates will, I argue, impact their willingness to offer as high a purchase price. Arguably a lower debt level will necessitate a greater amount of equity. This directly diminishes an investors cash-on-cash return. The inevitable result will be a softening of values since buyers will want to offer less.

Are there Other Factors?
The above-noted rationale, for establishing the link between interest rates and values does, however, ignore other factors which may impact market sentiment.

A recent study by Manulife Asset Management raises some interesting observations. In their March 2018 report entitled Canadian Commercial Real Estate Outlook, Manulife’s study observed that in fact there was no consistent relationship between real estate values and interest rates. One of their important findings was that although interest rates have been rising since November 2016, largely as a result of economic growth and higher inflationary pressure, capitalization rates actually declined. Why? Well apart from the sentiments of an individual buyer and lender, which is what I referenced in my earlier post, Canadian investors enjoyed improving real estate fundamentals. Yields were seen to be attractive in comparison to other investments, and there was a rise in foreign investment. All contributed to a support for commercial real estate fundamentals and stable or enhanced values.

Capitalization Rate Refresher
You may recall that capitalization rates are comprised of a nominal “risk-free” rate (often associated with a Government of Canada benchmark bond yield), plus a risk premium attributed to a specific property type or asset. If, as it appears, overall capitalization rates have declined, could it be that the “risk-free” rate is falling as well? I will encourage you to take a look at the Manulife report and come to your own conclusions. From a lender’s perspective, I do not doubt that rising rates have a bearing on what a buyer will pay for a property. I suspect real estate appraisers will be like-minded. The Manulife study, however, cautions us that there are macro-factors at play as well, and a strong economy is supportive of longer-term stability, and indeed growth, in the Canadian Commercial real estate market.

17 Jul

RATE HOLDS EXPLAINED

General

Posted by: Brad Lockey

Have you ever heard of the term rate hold?
If you have ever worked with a mortgage broker, chances are, you have!

Rate holds are something that the majority of lenders offer to potential clients purchasing a new home who need a mortgage. Rate holds are generally not given out for people refinancing their mortgage or looking to transfer it from one lender to another.

120 days is the longest rate hold available with lenders. Once you have created an application with a mortgage broker, they can submit it to an available lender offering rate holds on an interest rate you want to take advantage of- all without a property attached.

This rate hold does not commit you to working with a lender, does not commit you to working with the mortgage broker who submitted it, and does not hurt your chances of receiving an approval down the road (assuming you and your mortgage broker have not submitted multiple rate holds and plan to use a third or fourth lender).

For example, day one you submit your application to a lender for a fixed interest rate of 3.24% for 5-years, and on day 60 that interest rate moves to 3.54%, as long as your mortgage closes in the next 60 days, you are protected and can keep your 3.24% rate. If rates go down, not up, you can also take advantage of the lower interest rate.

The one caveat I like to explain is that this rate hold still means that you must qualify for the mortgage. It’s imperative that documents be collected upfront, credit is pulled and verified and the property being purchased is appetizing to the lender. Otherwise, your rate hold is worth the piece of paper it’s printed on, and nothing more.

Once the 120 days expires, there is nothing stopping you from submitting another rate hold, it will just be subject to current interest rates the day of submission. If you have any questions, contact a Dominion Lending Centres Mortgage Professional who can help.