The federal government recently announced some new rules that apply to Canadian housing markets and mortgage lending.
The goal was to slow down the escalation of home prices in Toronto and to continue that slowdown in Vancouver, although the changes apply to all mortgages nationwide. On one hand, the changes have been made to ensure that homeowners don't take on bigger mortgages than what they can afford, especially in the event that interest rates rise. On the other hand, the government wants to protect themselves from having to pay for losses by mortgage insurance companies and lenders if there is a price correction and homeowners can't pay their mortgages.
James Robinson, mortgage agent for Dominion Lending Centres, outlines the two primary components that will impact homebuyers:
Effective October 17, 2016, any buyer with less than a 20 per cent down payment will have to qualify based on a payment calculated at the benchmark interest rate (currently 4.64 per cent). This doesn’t mean they have to pay that rate (borrowers are free to choose any term they like and still negotiate the best interest rate); the lender simply calculates what the mortgage payments would be if the rate was 4.64 per cent and see if they would still qualify for the loan using that payment.
- Effective November 30, 2016, these rules will also apply to conventional mortgages (80 per cent loan to value and below – in other words, homebuyers with a 20 per cent or more down payment or a 20 per cent equity cushion in their current home) where the lender is buying default insurance through one of the 3 insurers (CMHC, Genworth, or Canada Guaranty). This is a common practice among all mortgage lenders so we expect this to be fairly standard practice across the board with all lenders. In these instances, a maximum amortization of 25 years will apply.
In an article by DLC economist, Dr. Sherry Cooper, she writes that the new rules "will actually make homeownership less attainable for the marginal borrower, which is often younger Canadian first-time home buyers," but acknolwedges that it could be a case of short term pain for long term gain. "It will make housing less attainable, at least in the short run. If it, therefore, substantially reduces housing demand, home prices could decline, ultimately improving affordability."
The so-called "stress test" that takes place to ensure borrowers can withstand higher mortgage payments in the event of a rate spike means that many people looking to buy a home will qualify for a smaller loan, in some cases a difference of more than $100,000. In many places, this could mean the difference between buying a home and not buying a home, and certainly in the differences in the type of home that the new lower price point makes available to buyers.
Additionally, in many cases, a maximum amortization of 25 years will be imposed. This 25 year amortization (compared to a 30 year amortization in when buyers have at least a 20 per cent down payment) can be both a blessing and a curse. The shorter amortization period leads to higher monthly payments, which will make it slightly harder to qualify for a mortgage but the higher payments also mean that a greater portion of those payments will be going towards the principal of the mortgage, which means that homeowners will see faster growth in home equity.
"Housing has been a very important pillar for the Canadian economy, especially at a time when oil price declines have decimated the oil sector and manufacturing continues to struggle," Dr. Cooper writes. "This is a case of being very careful what we wish for– I’m concerned that we might see more of a slowdown in housing than the government was counting on, which will certainly affect jobs and growth and reduce tax revenues at a time when budget deficits are mounting and fiscal stimulus has yet to do its job."
There may be other way that the new regulations affect you, especially if you're looking into investment properties or growing your portfolio of properties. Contact your mortgage broker today and find out more.
What the new mortgage rules mean for first-time home buyers, part 2