Golden Handcuffs

We used to use this expression when it came to employment & compensation packages, but now it’s just as applicable to the circumstances many would-be seller-buyers find themselves in today. Not to be confused with the Golden Parachute, which is a much more pleasant set of circumstances, lol!

If a seller has a fixed mortgage at a rate that is MUCH better than today’s rates & they want to sell their home and buy something else, it may not make sense financially, even if it makes sense in every other way, because their current rate is so good they can’t justify the increased payments on a new home at a higher rate. That was quite the run-on sentence, but that in a nutshell is the quintessential Golden Handcuffs situation.

An option to address this could be to port the existing mortgage to a new home & not everyone is aware of that. Port, blend the old rate with the new rate & extend the term of the mortgage. Unfortunately not all mortgages are portable though. Throughout the ultra-low rate environment of the past 10’ish years we’ve seen many cases of “stripped down” mortgages, those that traded super low rates for “privileges” like pre-payments & porting, causing home owners difficulties due to their lack of flexibility when something unforeseen arises. Another road block for some is Collateral Charge mortgages - those can’t be ported either because they’re secured differently than a traditional mortgage.


A colleague recently shared a story  about a client with the Bank of Nova Scotia who was spending more on a new purchase & was looking to port & blend and & the bank wouldn’t let them. They told them to pay the 20k penalty & THEN they would give them a new mortgage. Every mortgage is different, know your terms!


Another option could be an Assumable Mortgage. The buyer essentially takes over the existing mortgage with no changes to the terms & payments & pays you the balance of the purchase price in “cash”. The ability to assume a mortgage at a favourable rate can be a very attractive selling feature! That being said, they’re not that common here in Canada, but in theory most fixed-rate mortgages can be assumed. In reality, lenders don’t like them & don’t want to deal with them. A talented mortgage professional is a must when it comes to any sort of “outside of the box” financing ideas!


And yet another option could be a Rate Buydown. More common with mortgage brokers & new home builders, this is a scenario where the seller pays the lender a lump sum to lower the interest rate for a fixed term to benefit the buyer. More information on that HERE. Just like the Assumable Mortgage option above, this would be viewed as a selling feature if offered by the seller, or a negotiable term if asked for by the buyer in an offer. This is another “outside of the box” financing strategy where you want a knowledgeable & experienced professional at the wheel!


Another dilemma that’s holding seller-buyers back is the question of buying first or selling first. A good rule of thumb is that in an increasing market you want to buy first & in a balanced or decreasing one, sell first. If you’re buying & selling in the “same” market, then the state of the market is almost irrelevant. It can even be to your benefit if you’re a “move up” buyer. I wrote about the potential advantages last July in an email that went out to those who get my Mid-Month Note called “Moving Up in a Down Market” (I can't link an email but would be happy to forward it to you if you send me a message!)


There are a lot of facets to the buy first/sell first dilemma & one of them is the needing to know how much you can sell for, like the actual number, before you fully commit to purchasing. Enter the SPP (Sale of Purchaser’s Property) condition, which I wrote a blog post about last fall (see it HERE). It makes a lot of sense & was common practice when I first got in the business back in 2011, but is very rare to get accepted these days, at least in our local markets!


If you’re only willing to move for the “right” property & you can’t/don’t want to commit unless you have a firm selling price on your existing home & you can’t get an SPP condition accepted on that “right” property…how do you ever move forward?


Both of these very common scenarios essentially “handcuff” those who want (or need) to make a move. The “Golden” part is the fact that they’re already IN the market. But those handcuffs also keep inventory out of the market for those who are trying to break into it for the first time. It’s a big contributing factor as to why the entry level market stays very competitive regardless of what the overall market is doing. Less inventory at the entry level keeps prices elevated in this segment & competition fierce!


And finally, if you want to have a look at the full breakdown of market activity in July, click HERE  Spoiler Alert: all the leading indicators are down in July vs June BUT they’re up by a healthy margin when compared to July 2022.


Until next time,

No comments