With new mortgage rules announced by the Minister of Finance on Monday October 3, 2016, many Canadian home buyers could be affected. While there is the possibility of some benefit to the changes in terms of a cooling effect in certain markets, many buyers may feel some adverse effects of the changes effective October 17, 2016.
Currently a home buyer with a down payment of less than 20% (high ratio) requires mortgage insurance through CMHC or one of the two private insurers, Genworth or Canada Guaranty. Until now, the financing rules have differed for buyers who have less than 20% down versus buyers who have 20% or more to put down. Buyers with less than 20% down, buyers who chose a variable rate mortgage, and/or buyers that had mortgage terms less than 5 years, were subject to a stress-test that required them to qualify at the posted rate, typically a much higher rate than the home buyer would actually pay. However, all insured mortgages will soon require qualification based on the posted rate (currently 4.64%) no matter what their down payment or term, fixed or variable. While the posted rate isn't the rate the home buyer pays, it's the benchmark by which a buyer will be qualified. The intention is to ensure home buyers can afford their mortgage payments if interest rates were to rise to the current posted rate.
The effect could be minimal in some cases, but could be quite significant for others - in particular, first time buyers who may see their buying power reduced by as much as 20% or more. First time buyer or not, anyone buying in markets such as the Greater Toronto Area and the Golden Horseshoe, where home prices can be quite high, likely have a heightened need for as much buying power as possible. The new rules will reduce that critically important buying power. For example, a buyer with an income of $100,000 and a down payment of $40,000 would potentially qualify today for a mortgage on a house worth about $660,000. After the new mortgage rules kick in on October 17, that same buyer may only qualify for a little over $500,000. In some markets, that might not be a big deal, but it will make a big difference in what buyers can afford in Southern Ontario. There are also firm requirements on Gross Debt Service and Total Debt Service ratios of 39% and 43% of income respectively.
To fully understand all mortgage qualification requirements, how the new rules may affect you, and how much of a mortgage you may qualify for, you are best to talk to an expert mortgage professional before making any decisions with respect to the purchase or sale of any property. It is also wise to be pre-approved for your mortgage before making an offer on a property. I can connect you with some of the best mortgage professionals around and would be more than happy to hear from you. So, if you need a referral, just say the word!
John Merrill is a real estate professional specializing in assisting buyers, sellers, and investors achieve their real estate goals by delivering value through insightful, reliable service and by ensuring buyers and sellers alike get the best purchase or sale price possible. For any questions about this blog topic, or any other real estate topic, feel free to contact John at 905-630-0778, firstname.lastname@example.org, or on Facebook at @JohnMerrillRealEstate.