We may be experiencing a balanced market, but with continued low mortgage rates and moderate price increases, the demand for resale housing has expanded in the past few months. And often with demand comes the all dreaded bidding war – which is alive and well in Canada, especially in such large and booming metropolitan markets like Vancouver and Toronto.

So what exactly is a bidding war and how do we find ourselves in the middle of one? Bidding wars occur when there are multiple strong offers on a house. You are competing with other buyers who are just as passionate about your dream home as you are and if this isn’t stressful enough, you are also ‘blind’ to the other offers being handed to the seller. To make matters worse, the seller can take any offer handed to them. The winning bid doesn’t even have to be the highest offer, but could have better conditions laid out than what you’re proposing.

While multiple-bids are inevitable in an attractive market, you have to be careful not to let them steer you into a spiral of “ignorant bidding”; bidding higher than you normally would without understanding the consequences of your decision. It’s therefore important to do your financial homework and know your limit in terms of how much you can afford to borrow before even heading to the open house. This may be your “dream” house, but the payments coming out of your pocket could be more like a nightmare if you’re not prepared.

In Toronto, for Greg and Alison Irvine, the bidding war experience may have left them without the home of their dreams, but happy they had done their homework ahead of time. “We saw our dream home and it was difficult picturing someone else other than us owning it. But as soon as we found out there were multiple offers on the table, we knew it would get out of hand.” says Greg, “We had researched the current mortgage rates and determined a final amount that we were comfortable with borrowing. We knew that the bids would go over that amount, so we pulled out. It was sad that we didn’t get the house, but I guess that’s a better scenario than us putting in an offer that overvalued the property or one that we couldn’t afford.”

So should you enter into a bidding war, it’s important to go in with a clear understanding of what each bid will cost you in the long run. Realize that every additional $1,000 you add to the purchase price can ultimately add up to a price you can’t afford.

For example, after determining your budget for a home is $400,000, you then figure out how much your monthly payments will be. Using RateSupermarket.ca’s mortgage rate comparison calculator, you may see the best five year variable closed rate, amortized over 25 years is only 2.15%, making your monthly mortgage payments $1722.90. Based on those numbers alone, you may think you can bid higher and go up to $465,000, making your monthly payments $2002.87.

Perhaps you determine that the $279.97 difference per month is one you can afford, but it’s also important to look at the amount you’ll be paying long term. With a $465K mortgage, at 2.15%, you’ll be paying a total of $600,860.46 over your 25 year amortization period. While with the $400K mortgage, you’ll be paying a total of $516,869.11. That’s a difference of $83,991.35!

Seeing just how much you’ll be paying over the long term with each bid you make is important, but it’s also imperative to look at the possible shifts in interest rates, as they’re sure to affect your monthly and long-term payments; payments you may or may not be able to afford. For example, if you decide to put in an offer for $400K at 2.15%, after the five year term, those rates could shoot up to 3.75%, calculating your monthly payments at $1987.84. With a $465K mortgage, you’re paying $2310.87 per month.

Below is a chart to help further explain the difference between possible bids:

While entering into a bidding war is stressful, getting into a mortgage you cannot afford will make it difficult for you to enjoy that dream home you had set your limit so high for. Before entering into a bid and getting caught up in all of the excitement, be sure you have a clear understanding of the limit you can afford.

Caroline
PR@RateSupermarket.ca