What the new mortgage rules could mean for you

by YPNextHome

If you’re looking to buy your first home, listen up: the new mortgage rules that took effect in October 2016 will likely make it more difficult for you to get into the housing market.

The federal government has changed mortgage eligibility rules five times between 2008 and 2015. This latest round was intended to stabilize “overheated” housing markets, mostly in Toronto and Vancouver, slow home price growth and keep mortgage indebtedness under control.

All good things.

What the changes also do, though, is make it more difficult for young Canadians to take that important first homebuying step.

As of October 17, homebuyers who apply for a high-ratio mortgage (meaning they have less than 20 per cent as a downpayment) now have to undergo a mortgage “stress test” by qualifying at a rate they don’t even actually have to pay.

Yes, you read that right.

This stress test is intended to assure lenders that you, Mr. and Ms. Homebuyer, could still afford the mortgage if interest rates rise.

Alyssa Furtado, founder and CEO of ratehub.ca, a website that compares mortgage rates across Canada, says the best mortgage rate in Ontario at the time of writing was 2.29 per cent. However, the Bank of Canada’s qualifying rate for applicants is 4.64 per cent.

For example, a couple with a combined income of $100,000 has saved $40,000 for a down payment and they qualify for a mortgage rate of 2.29 per cent. We’ll assume their monthly property taxes will be $400, and their heating costs $150 a month.

Using RateHub’s mortgage affordability calculator, they’ll be able to afford a property costing up to $521,041 because of the new mortgage rules.

“Under the old rules, however, they would have been able to spend $635,700,” Ms. Furtado says.

Cha-ching: a difference of $114,659.

According to Calgary mortgage broker Jason Eldridge, by having to qualify for mortgage financing using the five-year Canadian benchmark rate, on average the maximum purchase price will drop by approximately 21 per cent, given existing five-year contract rates.

Now imagine the situation in Alberta, where the economy has already been hammered by the prolonged oil and gas slump. If you were looking to buy a home there, your buying power will now take a 20 per cent hit – on top of the economic uncertainty you may be feeling. Those in Alberta looking to sell a home, meanwhile, will now be trying to sell to many whose homebuying power has just been reduced.

Hello, double-whammy.

There were other rule changes announced that come into effect on November 30. For those looking to restructure or refinance an existing mortgage or purchase a property with at least a 20 per cent down payment, similar qualifying rules will apply in many cases. Lenders who use portfolio insurance and other discretionary low loan-to-value ratio mortgage insurance will now have to meet the eligibility criteria that previously only applied to high-ratio insured mortgages.

There’s no denying the rule changes will make it harder for some first-time buyers to get into the housing market. And they may also face higher mortgage rates. The key is to understand their implications for your own plans – aspiring homeowners will need to assess whether they are saving enough to meet the new down payment requirements.

For more real estate news and content, visit YPNextHome.ca.