Canada’s first-time home buyers may have to shelve their dream house fantasies due to new lending rules announced last week by the federal government.
The Government of Canada’s finance minister has implemented new measures for those with less than a 20% down payment. Effective October 17, 2016, all five year fixed rates (with less than 20% down) will be required to to be qualified at an interest rate of 4.64% instead of discounted rates which we see advertised everywhere. This will directly impact how much “mortgage” you can be qualified for. This is not a terrible thing, however, as it is being put into place to protect buyers from buying ‘too’ much house which could strain their finances if (and when) the interest rates increase. What is bad though is that it is creating a bigger pool of buyers that are no longer able to afford or qualify for mortgages in the area that they want to buy in.
First-time homebuyers will have to scale down the type of home that they may have wished to buy. Under the new rules, a stress test that had only applied to borrowers who opted for variable rate mortgages or fixed rate mortgages with terms less than five years will now be used for ALL home buyers with less than a 20 per cent down payment.
The idea is that potential home buyers must be able to show that if interest rates were much higher than they are today, they’d still be able to make their mortgage payments and other costs related to home ownership.
That means borrowers must be able to qualify for their mortgage using a higher interest rate than they will actually be paying on their mortgage. The advertised special offer rates for a five-year fixed rate mortgage at Canada’s big banks are around 2.5 per cent. However, the Bank of Canada-posted rate used in the stress test is 4.64 per cent based on the posted rate at the big banks. So, while you will NOT be paying more for a house, you will be able to buy LESS house.
An Example of the Impact of the New Lending Rules
As an example, lets take a Canadian earning $70,000 a year with enough saved for a five per cent down payment, and carrying $500 a month in non-mortgage monthly debt payments such as a car loan or credit card payments.
If this person was qualified using a fixed-rate of 2.44% over 5 years, this person could qualify for a mortgage of around $370,000 with the old rules. With the new lending rules, however, using a rate of 4.64%, the estimated mortgage amount for would be around $280,000.
For many homebuyers, these new rules will mean that they will have to settle for a less expensive property, save for a larger down payment or wait until they are earning more in the future.
Although the jury is still out on how this will impact renters, there is a belief that this could lead to rental increases across Ontario (most specifically the GTA). Like anything, we need to assess how the changes will impact our housing market, buyers ability to qualify for mortgages and the impact on renting over time.
Courtesy of: CTV News