02/08/2017
Government Changes to Mortgage Qualification and What This Means To You.
Recently on October 3, 2016 the Bank of Canada and the Federal government imposed what some would call drastic and sweeping rule changes to the mortgage industry. Now that some time has passed we can look at the impacts and consequences of these changes. There were four changes that were made. I will give a brief overview of one of the changes in this blog entry and my professional opinion on how this will affect the Canadian homebuyer/real estate investor. Future blogs will address the other rule changes
The first rue change is the one that will have the greatest impact on Canadian families. A “stress test” used for approving high-ratio mortgages will be applied to all new insured mortgages – including those where the buyer has more than 20 per cent for a down payment. This “stress test” is aimed at assuring the lender that the home buyer could still afford the mortgage if interest rates were to rise in the future. The home buyer would need to qualify for a loan at the negotiated rate in the mortgage contract, but also at the Bank of Canada’s five-year fixed posted mortgage rate, which is an average of the posted rates of the big six banks in Canada.
The impact of this change is fairly straight foreword when it coms to the buyers end. You have to qualify for the mortgage at a higher rate than the rate you actually get. The impact of this is that you will qualify for less of a purchase price. It decreases your purchasing power. Here is an illustration.
A Canadian earning $70,000 a year with a five per cent down payment, and carrying $500 a month in non-mortgage monthly debt payments such as a car loan.
Based on a five-year fixed-rate mortgage of 2.44 per cent, he estimated they could qualify for a loan that would allow him/her to buy a house worth about $370,000 under the old rules.
However, under the new stress test using 4.64 per cent, the same homebuyer could only afford to buy a home worth about $280,000. This is $90,000 less house this hypothetical consumer can qualify for.
So is this a good or bad thing? As with everything there are pros and cons to this decision. Firstly what I think is the best thing about the rule change is that it protects the consumer. Over the recent past I have seen many, many people get houses at the maximum for their income while qualifying at low rates. Rates cannot stay this low for long. When this type of consumer has to renew their mortgage and rates have jumped we stand a major risk of having people not being able to afford the house they live in due to rising payments due to higher interest rates. Below shows the impact.
Mortgage amount: $300,000 (25 year amortization)
Rate: 2.79%
Monthly payment: $1,387
Now if the interest rate rises to 5% the payment increases to $1,744/month. This is a $357/month difference. $4,284/year yearly after tax income that will be out of pocket.
As you can see buying to the maximum can carry some risks if financial situations change. The first time homebuyer will have to lower their expectations on what they will have for their home purchases. In my opinion it is better to play it safe with your home rather than buy to the maximum and risk putting yourself in a bad situation down the road.
How this rule change will impact the price of homes has yet to be seen. In the Lethbridge market we have not seen a drastic drop in prices or any at all. People will always need homes to live in. This is a fact that will never change. I believe this will shift buyers downward a step in what we buy. The age of McMansions may be slowing down as more realistic expectations will become the norm.
This is not a doom and gloom change as many have stated. It simply will change the amount of home Canadians will be able to buy. There are many economic spinoffs that will happen due to this. If citizens are not spending as much on their homes they have two options for their money. You can spend it or save it. In a time where saving levels have drastically dropped I believe this is a great opportunity for Canadians to become more conservative on their home spending and resume a common sense rainy day/retirement savings fund. With more disposable income in our pockets we will be in better control of our future rather than just putting all of our eggs in the housing basket. Sometimes change is not what we want, but sometimes it is what we need.
