They purchased homes right before the real estate downturn. Now, they're struggling to close

A group of Ontario residents who purchased pre-construction homes in Brampton at the peak of the recent real estate frenzy say they're now struggling to close on their deals because of a perfect storm of rising interest rates, falling home prices and stricter federal mortgage rules.

CBC News spoke to eight people who bought homes at the Paradise Developments Valley Oak community in late 2021 or early 2022.They all said they're having trouble gettingfinancing due to thesudden real estate downturnbrought on primarily by the Bank of Canada raisinginterest ratesin an effort to tame inflation, which has sent mortgage rates skyrocketingand home values plunging.

The buyers, who are mostly from the Punjabi community, say they want to honour their commitments, but with interest rates so high,many no longer qualify for mortgages.

Thosethat do qualify are being offered hundreds of thousands of dollars less than the amounts they're on the hook forbecause appraisal values have fallen dramatically over the past 10 months. Existing mortgage rates would mean unaffordable payments, they say.

Meanwhile, buyers who planned to sell their existing homes are finding fewinterested buyers as home sales decline across the country.

'We haven't slept,' buyer says

First-time homebuyerGurcharan Rehal agreed in October 2021 to pay $1.959 million, plus $90,000 in upgrades, for a single-detached home that would house himself, his wife, their two children and his mother.

"We thought, if we live hand-to-mouth, we can still afford it," Rehal, an Uber driver who also earns income as a property manager and from a business in India, told CBC News.

But with his closing date approaching next month, he's so far been unable to secure a mortgage.

An appraisal recentlyestimated the home's value at $1.7 millionmore than $300,000 less than what he agreed to pay for it.On top of that, he saysthe mortgage rate he was pre-approved for would have required monthly payments of between $5,500 and $6,000,but nowhe'sbeing quoted amounts between $12,000 and $15,000 per month.

Coming up with hundreds of thousands of dollars to cover the difference upon closing in addition to the $260,000 down payment he's already made and making exorbitant monthly payments issomething his family simply can't afford.

"Me and my wife, I think we haven't slept for [the] last three months," said Rehal."Our kids, they can see the stress on me and my wife's face."

Buyers want closing dates extended

The buyers CBC spoke to say there are around 100 people in the same situation at the development. They provided a contact list showing approximately 60 households.

"We are not able to eat, we are not able to rest," said PoornimaMalisetty, who purchased a detached home in the Paradise Valley Oak community with an in-law suite for $1.9 million that's now being appraised at $1.6 million.

"Even if we win a lottery, we will not be able to close."

The buyers are askingParadise to extend their closing datesor reducetheir purchase prices, and have protested outside the developer's sales office.

In a statement, Paradise Developments said it works collaboratively with purchasers throughout the purchase, construction and closing period.

"Paradise Developments makes business decisions, enters into contracts with suppliers, hires employees and commits to the contracting of numerous building trades based on agreements we have signed," the statement said.

"Whenever purchasers raise individual issues with us, we look to address them in accordance with our policies and the terms of our joint agreement of purchase and sale.Based on having finalized and completed these agreements, construction is now advancing on the homes in this community, and we look forward to completion."

Rehal saysParadise has offered some buyers a three month extension on the closing date in exchange for more money on their deposit, but with the future of interest rates uncertain, he's not sure if he'll take them up on it. They and the other buyers are stillcommunicating individually with Paradise and hoping the builder will extend their closing dates or reduce the prices.

Pre-construction a risky gambit, real estate broker says

John Pasalis, presidentof residential real estate brokerage RealosophyRealty, said the situation highlights the risks of buying pre-construction in a hot housing market.

"They're not buying a home. They're signing up on a contract that obligates them to buy a home in the future at some pre-determined price," said Pasalis.

"If, between the time you sign on that dotted line and the time you're about to take the keys, prices have declined, well, you're on the hook for that difference."

Buyers who wantto break their contracts risk losing their deposits.But if those buyers walk away, builders could also sue them in an effort to recover the difference between the original purchase price and the price they end up selling the home for.

That's something Paradise might do in this case.CBC viewed an email sent to one homebuyerwhere a lawyer for Paradise threatened legal action to recoup "all costs, loss and damages it may suffer as a result of your client's failure to complete this transaction."

Wrong home at the wrong time

The Bank of Canada began incrementally raisingits trend-setting interest rate in March when it was at 0.25 per cent. It's now at 4.25 per cent.

Home prices in the Toronto region, whichhad been rising steadily since 2018, have cratered since then, as have new sales.

The average sale price of a detached home in Brampton went from $1,608,894 at its peak in February to $1,197,119 in November, a decrease of more than $400,000, or 25.5 per cent, according to data from the Toronto Regional Real Estate Board (TRREB). The number of detached home sales in the city dropped to142 from 460 in the same period.

Variable mortgage rates, meanwhile, that were around 1.45 per cent one year ago have increased to around5.45 per cent, according to Ron Butler, founder of Butler Mortgage. Five-year fixed rate mortgage rates have increasedfrom 2.89 per centa year agoto around 5.49 per cent today, Butler told CBC in an email.

Compounding the problem is the federal mortgagestress test, which requires buyers to be able to show the ability to pay mortgage payments of 5.25 per centor twoper centabove their approved rate, whichever is higher. Most buyerswere stress tested at 5.25 per centlast year when interest rates were low, but nowthey'rebeing tested above sevenper cent.

"If you,by no fault of your own, got unlucky with your timing you can certainly be in a strained situation," said James Laird, co-CEO of Ratehub.ca and president of mortgage lender CanWise.

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Condo buyers are facing similar issuesand developers are also feeling the pinch of a challenging market.

Kevin Lee, CEO of the Canadian Home Builders Association, said inflation has raised construction and labour costs, whilehigher interest rates have raised the cost of financing projects.Lee said developers have very little flexibility when it comes to recouping their costs.

"When it's coming time to close onpurchases, it's not like there's a whole bunch of wiggle roomon the builder-developer side of things," Lee said. "Otherwise, they'rein a situation of taking big losses."

Laird and Lee say the market could stabilize sometime next year after the Bank of Canada hinted last week it may be finished with rate hikes.

That would be the best scenario for the Paradise buyers, but it could be a case oftoo little, too late.

"Emotionally and financially, this gonna disturb my whole life," said Rehal,who's now unsure if he'll everbe able to buy a house in Canada.