Wildfire nearby? It could complicate how much you pay for your new home

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Canada’s unusually early and severe wildfire season is causing delays and complicating the closing of real estate deals, even for homes unaffected by flames.

Wildfires can trigger moratoria on new home-insurance policies and put downward pressure on appraised values, two factors that can hamper homebuyers’ efforts to secure financing.

And while those effects are temporary – and far less serious than those facing people directly affected by a fire – they can result in added costs for both buyers and sellers.

In Halifax, real estate agent Jacqui Rostek Holder said she was shocked to learn that insurers had implemented freezes on new home-insurance policies within radiuses of between 25 kilometres and 50 kilometres from the massive fire that encroached on the city’s northwest in late May and early June.

“Halifax is a pretty dense city overall: 50 kilometres from the evacuation area encompasses most of it, even areas that are much further away,” said Ms. Rostek Holder, who is an associate broker at Royal LePage Atlantic’s Platinum Group.

But pausing the issuance of new policies for properties in the vicinity of a catastrophic event is standard practice for insurers, according to Craig Stewart, vice-president of climate change and federal issues at the Insurance Bureau of Canada.

“Typically the rationale is, an insurer does not want to be taking on new risk in an area that’s under imminent threat,” he said.

The threat could come from an uncontrolled fire, flooding, tornadoes or other natural disasters, Mr. Stewart added.

While none of Ms. Rostek Holder’s clients ran into this issue, she said she heard of a few cases of homebuyers who were temporarily unable to obtain policies for their new homes, which, in turn, caused their lenders to hold off on financing the deal.

Those delays then pushed back other home deals, as some homeowners waited for the sale of their home to close before finalizing their own property purchase, she said.

Most lenders require buyers to show proof they have bought home insurance before lending money for a mortgage.

Ms. Rostek Holder said her clients with deals about to close had already obtained an insurance binder, a document that confirms the insurer’s commitment to a policy. The issue, she said, was for other buyers who hadn’t already done so.

Leanne Myles, a Dartmouth, N.S.-based associate mortgage broker with the Clinton Wilkins Mortgage Team, said she has one client with a deal closing in July who hasn’t yet been able to procure an insurance binder for their new property.

Insurers lift any restrictions on new policies once they’ve determined that the threat has subsided, though when exactly that may be can vary by company, Mr. Stewart said.

One risk is that the delay will push back the closing date, which can require the redrafting of documents and result in added lawyer fees, Ms. Myles said.

But a particular at this time of rising interest rates is that the delay will cause a buyer’s mortgage rate hold to expire, potentially saddling them with higher borrowing costs, she said.

A rate hold is a guarantee that locks in a specific fixed-term mortgage rate for a certain period of time, usually up to 120 days. If a borrower finalizes the mortgage within that time frame, they’re entitled to that rate even if fixed rates on new mortgages rise in the meantime.

With financial markets putting upward pressure on fixed interest rates for new mortgages and renewing mortgages in response to fresh concerns about stubbornly high inflation, losing a rate hold can be costly for buyers. While Ms. Myles said none of her clients ran into this issue, she added it is a risk for borrowers experiencing delays.

“As mortgage brokers, we would fight for that not to happen,” she said. “But we would likely have to fight for it.”

Home appraisals are another potential headache for buyers and sellers, Ms. Myles said. That’s one of the top concerns for one of her clients, who is in the process of both selling their home and buying a new property within an area that was evacuated because of the fire.

While neither home has suffered damages, the worry is that property values in those areas might now be lower, Ms. Myles said.

The consequences of a lower-than-expected appraisal can be especially serious for homebuyers. If the appraised value is below the agreed purchase price, the lender will fund a smaller mortgage. If the deal falls through because the buyer can’t bridge the difference between the mortgage and purchase price, they could lose their deposit and face penalties.

But buyers can protect themselves by making their purchase conditional on obtaining home insurance as well as financing.

Mr. Stewart, in particular, recommends tying the insurance condition to the closing date, rather than a particular interim period. That way, the safeguard holds even if the closing is postponed, he said.