Have you purchased a pre-sale condo or townhouse in the past two years?
If you entered into a contract with a developer to purchase a pre-sale property within the past two years, chances are you will be completing that purchase within the next 6 to 12 months. You're probably feeling a mix of excitement and anxiety. Why anxious, you may ask? Well, moving is always stressful, and the idea of writing a large check can be anxiety-provoking. Moreover, if you bought the property with the intention of using bank financing, you might be in for a rude awakening when it comes time to secure your mortgage.
Are You a Pre-Sale Property Buyer? Prepare for Rising Mortgage Rates
Two years ago, 5-year fixed-rate mortgages were around 2%, with rates hitting rock bottom. However, when it's time to complete your purchase in the next 6-12 months, rates could likely be in the range of 5-5.5%.
Let's consider an example using these numbers: a purchase price of $1.5 million with a $500k down payment and a $1 million mortgage.
In June 2021, that $1 million mortgage would have cost you $4,234 per month, based on a fixed 5-year rate of 2% and a 25-year amortization period.
However, with the current rate of 4.9%, that same mortgage would now cost $5,759 per month. This represents an increase of $1,525 per month or 36%. Keep in mind that this increase is paid in after-tax dollars, so if you are in a 45% tax bracket, you would need to earn $2,772 more per month to cover the increased mortgage payment of $1,525.
Managing Higher Mortgage Costs: Seek Financial Guidance for Pre-Sale Purchases
The saving grace in the face of higher mortgage rates is the stress test that was applied to all those seeking pre-qualification. Many of these buyers have undergone stress tests at rates close to the current levels, which is great because it means they can manage the increased payments.
Unfortunately, if one finds themselves unable to afford the high cost of borrowing, they may be forced to either sell the pre-sale property before completion or assess their overall financial situation to find ways to make the purchase more financially comfortable.
If you find yourself in this uncomfortable situation, now may be a good time to speak with your banker or financial advisor to explore potential solutions.
We are also available to provide suggestions on how best to move forward. Feel free to call or message us anytime.
Andrew & Jill Hasman