Investors caught off guard by rising mortgage rates

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Investors caught off guard by rising mortgage rates

The rise in mortgage rates makes certain investments in apartments under construction much less profitable.

For nearly 10 years, buying a new condo in Toronto was considered a good investment, but rising mortgage rates combined with price caps are changing that. The bill is getting heavier for investors; some are even struggling to make final disbursements as construction draws to a close.

Those who have bought homes off-plan, in particular, are in an increasingly hard. Some are unable to finance the final stage of the purchase because the assessed value of the property is lower than expected and because mortgage rates are higher than at the time of purchase. ownership.

Preconstruction condos were mostly purchased in 2019 and 2020. Once commission and fees are added, these buyers no longer make a profit. They're likely making a loss, says Jordon Srinko, CEO of Precondo, a company that handles many preconstruction projects.

He says the past few months have been very busy for his company. And that is nothing positive.

“We 'put out fires', we calm people down, we try to find solutions off the beaten path.

—Jordon Scriko, CEO of Precondo

He adds that the company is getting calls from customers of other businesses seeking help as the date of occupation is approaching.

We try to offer them solutions and help them through this difficult period.

Given the changing conditions, experts say some investors are opting for caution. Promoters are also backtracking. Data released in October show that there are fewer new condominium projects than expected this year.

The long-term repercussions of this situation on housing supply are of concern to the when the needs are terribly great.

According to the Toronto Regional Real Estate Board, condo prices are up 4.5% over the same period last year.

However, since March, prices have fallen by almost 12% in the Toronto area and by almost 11% in the city itself.

At the same time, the increase in the Bank of Canada's key rate caused mortgage rates to rise. A closed five-year fixed rate mortgage is offered at around 5% at most banks.

The calculations made by some investors who have bought off-plan homes in recent years no longer hold up.

The mortgage context is totally different, says Ron Butler of Butler Mortgage in Toronto.

Investors who bought 18 months ago could get a mortgage, fixed or variable, for a relatively low interest rate.

It's behind us. It's now within 5% everywhere, says Butler, who notes that those who have invested in multiple properties in recent years are in a tougher spot.

“They have to find a way to cover the closing costs of three different condos in a market where the rents are unlikely to cover the cost of the mortgage.

—Ron Butler, of Butler Mortgage

Investors who have purchased off-plan apartments hoping to sell before the occupancy date are currently finding themselves in the very crowded market for disposal sales.

The original buyer can sell the contract concluded with the builder to a new buyer. As a rule, these transactions were very profitable, because they occurred years after the purchase, but very close to the end of the construction.

Although it is difficult to quantify these sales since they are not advertised by the Multiple Listing Service (MLS) – Jordon Srinko believes that it is still possible to obtain a property at a good price because of the offer

I've been saying it for years: don't buy a pre-construction condo with the sole objective of reselling it quickly for a profit. It's worked for over 10 years in Toronto, but it's going to stop working one day, he warns. Guess we've come to this.

With information from Farrah Merali, CBC

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