How New Mortgage Rules from January 1, 2018, effect First Time Home Buyers.

Highlights of Mortgage Rules Changes in 2016 & 2017

 

  • A stress test for all insured mortgages where the home buyer has less than 20% down payment, with new buyers having to qualify for mortgage loans at the Bank of Canada’s (BoC) benchmark rate – effective November 2016.
  • Restriction of mortgage insurance to owner-occupied dwellings, shorter maximum amortization period, the purchase price of less than $1 million, and a minimum credit score of 600.
  • Maximum Gross Debt Service ratio of 39% and Total Debt Service ratio of 44% – calculated using the higher stress-test rates.
  • Increase in the mortgage default insurance premium payable on insured mortgages to as high as 4% – effective March 2017.
  • Imposition of a 15% foreign buyers tax in British Columbia (August 2016) and Ontario (April 2017), plus other control measures.
  • A similar stress-test for uninsured mortgages where the buyers have 20% or more of their down payment – starting January 2018.
  • A stress-test will also be conducted when homeowners who are refinancing their mortgage change lenders. 

    Potential Impact of New Rules

    Increased regulation in the housing market often has a predictable outcome, at least in the short term.

    Generally, it’s likely we will see the following:

    • Increased demand for homes in November and December 2017 as individuals with pre-approved mortgages rush to close.
    • Increased activity in the cheaper homes category and less activity in pricier categories. New homebuyers will qualify for fewer mortgage loans when the new rules come into effect.
    • Some slow-down in the growth rate of house prices (year/year), especially in areas like Toronto and Vancouver.
    • Increased patronage of lenders who are not federally regulated, such as credit unions.

    Mortgage Affordability under the New Rules

    Old Rules: Assuming a 20% down payment, 5-year fixed mortgage rates of 2.84%, and a 25-year amortization; a family with an annual income of $100,000 can afford a home worth $693,405.

    New Rules: Applying the new “stress-test”, the family must qualify for the mortgage using the greater of 4.89% and 4.84% (calculated as 2% + 2.84%). Therefore, with 20% down payment, a 5-year fixed rate of 4.89%, and 25-year amortization, the family can now afford a home worth $591,537.

    The difference is that under the new rules, the family’s affordability has dropped by $101,868 (-15%). A bank that was willing to lend them $700,000 before is now only able to loan them approximately $600,000.

    Closing Thoughts

    There are going to be different takes on how people see the recent mortgage rules. Many new homebuyers, sellers, and realtors will definitely hate the increased hassle. In my opinion, it’s a mixed bag – on one hand, it’s better to have a housing market that’s healthy and stable; and on the other hand, many young people and new immigrants may have a tougher time becoming homeowners. Overall, if a slower housing market results, it will benefit new homebuyers who qualify. Like I discussed in my article on home affordability, no matter how much the bank is willing to lend you, ensure you only buy a home you can afford.

    I like hearing from my readers. If you have any thoughts or questions, please feel free to contact RV Singh at 647-490-9777