Were you hoping to secure a mortgage based on previous conversations with your bank, only to find out they’ve rejected your application?
Or perhaps you were prequalified for a mortgage just a few months ago, but now your bank has suddenly changed the status of application? In this article, we will try to explain why such a situation could happen and what the current real estate buyer’s struggles (as of the last quarter of 2023).
There are reasons your bank can turn you down:
Impact of Rising Interest Rates
Canadian banks are renowned for their conservative and prudent mortgage approval practices. While this approach contributes to the overall stability of the country’s economy, it may not always favor prospective buyers. The significant interest rate hikes during 2022 and 2023 mean that buyers now need to demonstrate approximately 30% more income to qualify for a traditional bank mortgage.
Uncertainty in the Real Estate Market
The market is currently experiencing general uncertainty, which is translating into stricter requirements for both financing and refinancing. Here are the two factors that affect the banks:
- Preconstruction Condos: If you purchased a preconstruction condo within the last two years, there is a risk that its equity has gone down in numbers, and its appraisal value might be lower than the original contract price. As a result, banks are exercising caution when extending mortgages, even to clients who were previously prequalified.
- Shifting Demographics: The COVID-19 pandemic prompted many professionals, including IT workers and service industry employees, to transition to remote work. This shift led to a migration away from major cities, with individuals saving on housing costs or purchasing properties in more affordable regions. However, the current trend is seeing professionals return to metropolitan areas, creating uncertainty in housing demand and pricing dynamics.
Impact on Self-Employed Individuals
Self-employment income has always been “under the magnifying glass” of the banks. Today, with factors such as the post-pandemic economic slowdown, market fluctuations, and technological changes, this segment is affected even more. Even the real estate industry itself, which employs about 20% of Canadian business owners, has experienced a slowdown. Banks have become increasingly stringent in their evaluation of self-employed applicants, making it almost impossible for them to secure a mortgage.
Stricter Policies and Fewer Exceptions
Previously, underwriting programs made exceptions for various population segments, including self-employed individuals, new immigrants, or “high net-worth” buyers. However, these exceptions have become scarce due to stricter lending policies.
The Ontario real estate market has experienced a slowdown in 2023, with prices even dropping. It is anticipated that the market will stabilize and begin to grow again by the end of 2024. During this interim period, property buyers may face challenges when seeking mortgages from their banks, given their stringent lending policies, which tend to tighten during economic slowdowns.
If you find yourself among the Canadians encountering difficulties in securing a traditional bank mortgage, it may be worth considering alternative options. Explore alternatives such as private lenders (B-lenders), credit unions, or specialized mortgage products. Another option is to consult with mortgage brokers, like AppGear Capital, who have the expertise to guide you toward the best-suited solution for your unique situation.
