Many Canadian homeowners are discovering that declining property values can have a significant impact on their mortgage options. As home prices soften in some markets, borrowers who once believed they had substantial equity, are finding themselves with fewer choices when it comes time to refinance or renew their mortgage. 
Mortgage brokers across Canada are seeing more homeowners affected by lower appraisal values, which can limit access to equity and make it difficult to qualify for refinancing solutions.
Why Appraisal Values Matter
Most lenders limit mortgage refinancing to a maximum of 80% of a property’s current appraised value. This includes all loans registered against the property, such as:
- First Mortgages
- Second Mortgages
- Home Equity Lines of Credit (HELOC)
When a property’s value declines, homeowners may no longer have enough available equity to refinance, consolidate debt, or switch to another lender offering more competitive terms. In some cases borrowers may be forced to renew with their existing lender because they do not qualify elsewhere.
The Growing Risk for Pre-Construction Buyers
Many Canadians purchased pre-construction homes and condominiums during the height of the real estate market, when prices and demand were rapidly increasing.
The challenge arises when the property is completed and its appraised value is lower than the original purchase price.
Example: You agreed to purchase a pre-construction property for $700,000. At completion, the lender’s appraisal comes in at $650,000.
This creates a $50,000 financing gap, that must be covered from your own savings or alternative financing sources.
For some buyers, this unexpected shortfall can make closing on the property extremely difficult.
Understanding Pre-Construction Mortgage Financing
Unlike resale purchases, pre-construction buyers often commit to a property, years before completion. While the purchase price is known upfront, future mortgage rates and property values are not.
Most lenders do not complete the final appraisal until the property is nearly finished. If market values decline during the construction period, buyers may face challenges obtaining the financing they originally expected.
Some lenders will give you an approval in advance, locking in a rate for 1-3 years. These rates are usually drastically higher, to take into account future rate fluctuations. If the closing date happens after that rate hold period, the approval is cancelled. Most people don’t get their financing sorted when they purchase a new construction.
Scotiabank is one of a few lenders that will give you a firm approval and confirm the value at time of purchase. But if there are any material changes, it could affect that approval. They also only offer up to 2-year rate holds.
Your Options if the Appraisal Comes in Low
If your completed property appraises below the purchase price, several options may be available:
- Put down a larger Down Payment: Additional funds can help bridge the financing gap and allow the transaction to close.
- Explore Alternative Lending Solutions: Alternative and private lenders may offer greater flexibility than traditional banks. An experienced mortgage broker can help determine whether these options are appropriate.
- Consider an Assignment Sale: In certain situations, selling the property before completion through an assignment sale, may help limit financial exposure. While this option may involve a financial loss, it can sometimes prevent larger legal or financial consequences.
Planning Ahead Can Reduce Risk
Pre-construction homes offer many advantages, including modern designs, energy-efficient features and the opportunity to purchase before construction is complete. However, buyers should also understand the risks associated with changing market conditions.
Before committing to a pre-construction purchase, it’s important to have a financing strategy and contingency plan in place. Understanding your options today can help prevent surprises tomorrow.
At Client first Mortgage Solutions, we help homeowners and buyers in Maple Ridge and throughout British Columbia evaluate financing options, understand lending requirements and prepare for changing market conditions.
Original Article: www.moneysense.ca
