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Robert McLister: To lure potential buyers, builders are offering mortgage incentives
Published 02 August 2024 • 3 minutes reading time
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A house under construction in Toronto on Saturday, January 6, 2024. Photo by Galit Rodan/Bloomberg
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Countless builders are left with newly built homes that they can't sell. It's not because their product isn't good. It's because many people can't afford it due to absurdly high affordability – or don't want to buy it due to market uncertainty.
To lure potential buyers out of their trance, builders are offering mortgage incentives. Countrywide Homes, for example, is offering three-year mortgage rates of just 2.34 percent. That's less than half the usual market rate.
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“We have inventory that needs to be moved,” says Richard Mariani, sales and marketing manager at CountryWide Homes. “Basically, we're buying the interest rate down from the lender. And that helps. We get a lot of inquiries.”
I asked who the lender was, but he wouldn't tell me. “The bank doesn't want to put its name on it,” he said. “That way there will be fewer questions from their other customers.”
Despite Countrywide's red-hot financing promotion, Mariani hasn't seen any takers yet. “Buyers want to negotiate one way or another, but most buyers already have their own lender, so if they want a better price, we'll give them a better discount instead of the lower interest rate. I haven't sold a house with a mortgage yet.”
One reason could be related to mortgage qualification. If a builder gives you an incentive, the lender usually deducts it from the loan-to-value ratio. In the case of an insured mortgage, the lender always deducts this amount.
The result is that you have to put more money down. For example, let's say you buy a home for $500,000 with a 5 percent down payment and a $30,000 builder's rate incentive. That $30,000 reduces the loan value to $470,000. Lenders will only give you a mortgage for up to 95 percent of that, or $446,500. If no incentive was used, you could potentially get a loan for up to $475,000. (Default insurance fees are additional and are usually built into the mortgage.)
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By taking advantage of this temptingly low interest rate, you effectively double the required down payment, which is why some borrowers pressure builders for a larger discount on the purchase price instead.
Also note that mortgage regulations require you to prove you can afford much higher interest rates than you will be paying. To get this 2.34% offer, borrowers must meet the 5.25% minimum interest rate required by our banking regulator.
You also need to read the fine print. Some builders place limits on the size of the mortgage that will qualify for a special interest rate. In the case of Countrywide, the maximum mortgage is $1 million, although they sell many homes for over $2 million.
By the way, it may take a while, but once interest rates drop enough that more homebuyers get off the couch and head to developers' sales centers, these incentives will fall by the wayside.
“It could take two to three years before we have a hot market again,” Mariani predicts. And if interest rates continue to fall as sharply as they have since June, it could happen sooner. “The smart buyer who has been standing aside so far is just watching and waiting.”
Insured amortizations over 30 years are back
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First-time buyers who pay less than 20 percent and have standard insurance can now get a 30-year payback when they buy a newly built home, as the government aims to encourage builders to build and give buyers a discount on their monthly payments.
“I think it will help (boost the construction sector),” Mariani says. That's one reason why “we're starting to offer more products under a million dollars,” he adds.
Unfortunately, there are no significant incentives for building single-family homes in major markets due to outdated default insurance rules that limit default insurance to homes priced at $999,999 or less.
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In 2021, the Liberal government proposed “raising the insured mortgage limit from $1 million to $1.25 million and adjusting it for inflation to better reflect today's home prices, as this threshold was last changed years ago.” Three years later, still nothing has happened.
Robert McLister is a mortgage strategist, rates analyst, and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
The rates shown below are updated by the end of each day and are taken from the Canadian Mortgage Rate Survey by MortgageLogic.news. Postmedia and Imaginative. Online Inc., the parent company of MortgageLogic.news, receive compensation from certain mortgage providers when you click on their links in the charts.
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