In spite of Ontario’s cooling market and record-high mortgage rates, bidding wars are still a common practice in Toronto. Pockets of the city see properties sell over asking — from small apartments and semi-attached homes to luxury houses alike.

Cailey Heaps of Heaps Estrin Real Estate team told the Financial Post that her realty group saw a resurgence of bidding wars since last summer. In her experience, a bidding war led to a High Park-Swansea semi-detached property selling for 13 percent above the asking price. A sought-after downtown home sold for a whopping 33 percent over asking.

With a bidding war always a possibility in the city, it’s important that first-time homebuyers understand what buying over asking means.

What is a Bidding War?

A bidding war happens when more than one buyer puts in an offer on a property.

In Ontario, blind bidding occurs — which means you don’t know how much the other buyers have offered; only that someone has put in another bid.

If there are many buyers competing for one property, blind bidding can quickly drive up the price of a property, eventually pricing out many would-be buyers.

How Does a Bidding War Affect Your Mortgage?

Forgetting about the selling price for a moment, let’s turn to the mortgage. Most financial institutions will offer you a mortgage based on their appraisal of the property’s value.

After a bidding war, the value and the selling price can be drastically different numbers. Unfortunately, the bank will only offer a mortgage based on their appraisal.

So, let’s say you offer to pay $750,000 on a home that the bank values at $700,000. You may only qualify for a $700,000 mortgage, which leaves you responsible for the $50,000 difference in your bid.

First-time homebuyers may not be aware of this condition. Suddenly on the hook for your extra bid, buying a property can be a lot harder than you realize.

Using Your Safety Net to Cover Your Bid

Bidding on your dream house may seem worth it if you have an emergency fund. You can dip into these savings to cover your out-of-pocket costs. But draining your emergency fund at this moment in your homeownership journey could be risky.

Without an emergency fund, you may be vulnerable to unexpected expenses during your first year of homeownership.

Many first-time homeowners rely on an online line of credit for those emergency renovations they can’t afford to delay. If you don’t already have a line of credit in your financial toolkit, you may find online loan options for Canadians in Ontario. Just pay close attention to the Toronto line of credit rates available today. Interest and finance charges may be specific to your city, so it’s important to start your search with this distinction.

If approved, you can use personal loans in Ontario as a backup emergency fund, covering essential renovations you can’t ignore.

Making an Informed Bid is Essential

Don’t make a bid without being informed; while you may not think losing your emergency fund is that big of a deal, it could cause problems sooner rather than later.

More than three-quarters (77%) of new homeowners take on repairs and essential maintenance in their first year of ownership.

Keep this in mind if you are about to enter a bidding war. While there are personal loans to help in emergencies, you should know the financial significance of putting in a higher offer.