What new mortgage rules mean for first time homebuyers
Here's this month's question: "We've been saving forever to buy a home and we're almost ready. What will the new mortgage rules mean to us as first-time buyers?"
Well, here's hoping you weren't banking on a 30-year term because those days are over.
Ottawa announced new rules in June designed to tighten Canada's mortgage industry and curb the hot market. Changes include:
- Reducing the maximum amortization period to 25 years from 30 years for those who have a down payment of less than 20 per cent.
- The maximum people can borrow when refinancing a property is now 80 per cent, down from 85 per cent, of the value their home.
- Government-backed mortgage insurance will no longer be available on homes that cost more than $1 million. In other words, you need a minimum 20 per cent, or $200,000, down payment.
- The new gross debt-service limit is 39 per cent, down from 44 per cent.
The rules came into effect July 9. However, a survey conducted by Pollara for Bank of Montreal at the time revealed only about half of those surveyed knew about the changes, despite two-thirds saying they were familiar with the mortgage rules in Canada.
While sales were steady in July, the average price of a home in Canada was $353,147, down two per cent from the same time last year, according to a report from the Canadian Real Estate Association.
Some experts believe the new rules are already having their desired effect and cooling an overheated market.
Sam Soukas, real estate agent with Re/Max in Toronto
Things have definitely changed, says Soukas who focuses on some of Toronto's hottest neighbourhoods, including Leslieville, Riverdale, East York and the downtown core. Summer is typically slower, but this year it's more noticeable as people adjust to the new rules.
"What we are seeing is a section of the buying population having to wait a lot longer before they get in the market," he says, adding the 30-year amortization was a huge draw for first-time buyers struggling to get a foothold in a thriving market. "Everyone was doing it. Prices got so high so people were just trying to make those payments as low as possible."
Last year a hefty 40 per cent of new mortgages were amortized for 26 to 30 years, according to a survey from the Canadian Association of Accredited Mortgage Professionals.
Now the shorter amortization has driven up monthly carrying costs and buyers are finding it difficult to afford the house they're after.
Soukas points to clients who moved fast to close the purchase of a $580,000 home in June, before the new rules came into effect: They put 12 per cent down, or $69,600, opting for 30-year amortization and it stretched their finances to the absolute limit.
With a five-year term and rate of three per cent, their monthly payments are $2,145.07, compared to $2,413.05 had they waited and been subjected to the new 25-year rule. That $267.98 difference matters to those starting out, especially when money is tight.
"The changes make the monthly payments a little bit higher, so you afford less house," says Soukas, while acknowledging that "in the end you're better off doing the shorter term because you save on interest. It's all about affordability."
Patricia Collins, Vancouver-based accredited mortgage professional with Mortgage Evolution
"With moving from 30-year to 25-year amortization you are bumping up the debt ratios, so this change, combined with a lower allowable debt ratio, is a double hit for those who were already struggling to enter the market," says Collins.
The new gross debt-service ratio — that's the maximum percentage of household income one allots to cover housing costs, such as mortgage payments and property taxes — is now 39 per cent, while the total debt-service ratio — the housing amount plus all other debt payments, such as lines of credit or credit cards — is 44 per cent. (The Canada Mortgage and Housing Corporation recommends total gross debt-service ratio not exceed 32 per cent and total debt-service ratio not exceed 40 per cent.)
Collins works in the Vancouver market where the average house price is $667,462 and she says clients with a solid credit score were pushing the debt-service ratio to qualify.
"This allowance is no longer there, so the flexibility to bump up the mortgage a little for those borrowers who had proven they were responsible with their other liabilities is now gone. If clients were just over the max ratios there was a bit of discretion on a case-by-case basis, but the new ratios are set in stone."
The new rule capping the maximum allowed price for an insured mortgage at $1 million is also hard to swallow in Vancouver where many houses exceed $1 million. "Families in these markets will now have to wait even longer to get into their first house because they cannot purchase one until they have 20 per cent as a down payment," says Collins. "Needing $200,000 versus $50,000 (the previous five per cent) is a game changer."
Collins also notes that pre-approvals under the old rules are not valid: "There must have been a signed contract and approved insurance application dated prior to July 9 to qualify for an exception."
Bottom line: As a first-time buyer, you should contact your mortgage broker to evaluate your situation under the new rules and ensure you qualify for the home you're after.
Michelle Warren is a freelance writer in Toronto.