Interest Hike in 2022: Should You Get a Mortgage Pre-Approval Now?

With interest rates sure to rise in 2022, getting a mortgage pre-approval now could help avoid the upward adjustment in borrowing costs.

| More on:

The low-interest-rate environment in Canada is ending soon. Homebuyers and mortgage borrowers are in a jam, if not frantic, about what is to come in 2022. The Bank of Canada can no longer avoid hiking interest rates due to the fast-rising inflation. Some economists predict the Feds will implement the first round of increases early next year, followed by at least five more hikes.

Apart from the affordability issue with buyers, sellers are in a fix, too. They might be buying replacement properties at inflated prices due to low inventory levels. But for borrowers stressed out by rate hikes, obtaining a mortgage pre-approval makes sense.

Interest rate hold

Banks or mortgage lenders would not dishonour pre-approval rates, and, in most cases, the interest rate hold could be up to 120 days. The primary benefit of mortgage pre-approval is protection against upward changes in interest rate. You’d avoid the rate hike or derive a discount as long as the pre-approval is valid.

Some brokers note that homebuyers are lining up, if not rushing, to lock in their mortgage applications. It should be meaningful and worth the effort if you follow the same approach. You’ll know you’re borrowing beforehand and make adjustments in case your chosen home is beyond your budget.

If you’re a real estate investor, hold off buying physical properties in the meantime. Industry observers believe the demand will decline and prices will stabilize once borrowing costs increase. The next-best alternative to earning income is through real estate investment trusts (REITs).

Specialty REIT

Do you dream of being a landlord to automotive dealerships? Automotive Properties (TSX:APR.UN) is a $531.69 million REIT that owns more than 60 income-producing automotive dealership properties. Despite the strong fundamentals of the automotive industry, it wasn’t spared from COVID-19’s destruction.

Because of the significant drop in sales of auto dealerships. Automotive Properties incurred losses in 2020. However, 2021 sales are trending upward in that the REIT reported a net income of $75 million in the nine months ended September 30, 2021. It lost $3.21 million in the same period in 2020.

According to Milton Lamb, Automotive Properties’s CEO, the REIT is now collecting 100% of contractual base rent every month. The real estate stock trades at $13.14 per share and pays a 6.12% dividend if you invest today.

National REIT

A leading national REIT like Crombie (TSX:CRR.UN) is a valuable addition to any stock portfolio. This $2.99 billion REIT has grown its properties under management to 284 in 57 years. More importantly, its strategic partner is Empire Company, an iconic grocery chain operator. The plan is to continue to build a high-quality REIT over the next 10 years.

In the first three quarters of 2021, Crombie’s property revenue and net property income grew 9.3% and 9% compared to the same period in 2020. Its president and CEO Don Clow said the focus is to grow and optimize the grocery-anchored, residential, and retail related-industrial portfolio.

The REIT will invest consistently at scale in Empire initiatives and developments. At $18.37 per share (+31.81% year to date), Crombie pays a lucrative 4.85% dividend.

Inevitable increase

Homebuyers don’t know what lies ahead, except the inevitable increase in borrowing costs. Choosing between fixed and variable mortgages is a dilemma in addition to high real estate prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AUTOMOTIVE PROPERTIES REIT.

More on Dividend Stocks

A meter measures energy use.
Dividend Stocks

Got $5,000? 3 Utility Stocks to Buy and Hold Forever

These three Canadian utility stocks offer steady growth, strong dividends, and long-term wealth. Buy and hold them forever

Read more »

jar with coins and plant
Dividend Stocks

Here Are My Top 2 Undervalued Stocks to Buy Right Now

Do you want some undervalued stocks to buy today? Whether its growth or income, here's a duo that make a…

Read more »

data analyze research
Dividend Stocks

Better Stock to Buy Now: Manulife or CIBC?

Both Manulife and CIBC had a great year last year. It may be smart for investors to wait for a…

Read more »

grow money, wealth build
Dividend Stocks

TFSA Growth Strategy: Turn $350 Weekly Into $100,000

By investing $350 per week in index funds like iShares S&P/TSX 60 Index Fund (TSX:XIU) you can achieve a $100,000…

Read more »

dividend growth for passive income
Dividend Stocks

3 Top Canadian Growth Stocks to Buy Now for Long-Term Growth

Canadian growth stocks can be a great way to create long-term growth, and these are at the top of the…

Read more »

Caution, careful
Dividend Stocks

3 Big Red Flags That Could Trigger a CRA Audit on Your TFSA

TFSA users engaging in business-like activities for profit will trigger a CRA audit.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

TD Bank Stock: The Easy Money’s Been Made

After settling with US regulators, this Canadian bank stock should at least market perform, but should you buy more shares?

Read more »

grow money, wealth build
Dividend Stocks

3 Top Canadian Stocks to Buy for Dividend Growth

Discover three outstanding Canadian dividend-growth stocks that have consistently delivered double-digit payout increases, fueling income growth for long-term investors.

Read more »