The winds of real estate change are blowing again, this time from Parliament Hill.
We've seen many new measures and policies unfold for finance and real estate over the past years - the most recent being the Provincial Government's Fair Housing Plan in April 2017 - but this week the Federal Government has announced changes to Canada's mortgage rules, which the Toronto Dominion Bank projects will further slow housing market activity, depressing demand by five per cent to 10 per cent once implemented.
At Urbaneer, when it comes to mortgage matters, we turn to Jake Abramowicz - aka MortgageJake. Always ready with an informed frank analysis, here's his assessment on the recently-announced mortgage rule changes, who it will affect, and how to avoid getting burned.
As a regular reader this blog, you already know that the Urbaneer team takes a very prudent approach to real estate. Their approach emphasizes research and planning to ensure the home buying and selling process is an enjoyable and successful one. It's about support, not control. In my opinion, the Government of Canada seems to be taking the opposite approach with the announcement of new mortgage rules, further regulating lending and borrowing. I’d like to help explain what the changes are, what they mean for you, and, how to manage your stress levels when it comes to financing your next property.
What's Changed? And Why?
First off, what’s up? Why the change? Simple. The Government of Canada is both worried about our existing housing market being over-inflated in value and potentially correcting AND that the recent spike in values - mostly in Southern Ontario and Vancouver - are impacting the capacity for middle-class Canadians to secure housing at an affordable price. As a result, the Federal Government is introducing a new stress test in the hopes it tempers the market's untenable spike, limits the potential fallout should interest rates rise in the future rendering owners unable to afford carrying their mortgage debt, while hoping existing house prices escalate moderately so that the next generation of Canadians can afford to buy property..
Fair enough. The solution is the introduction of new mortgage qualification 'stress test' that has stricter guidelines. In a nutshell, every borrower with 20% down or more has to now qualify at a higher interest rate. As a result, Buyers will be able to borrow less monies for their purchase, meaning they can now afford to pay less for property.
The simplest way to break this down is:
Prior to the changes, the maximum someone could qualify for is about 7x income. After the changes take effect, that’ll go down to 5x income.
But what about borrowers with less-than 20% down? Well, as you remember, in October 2016, there was another stress test implemented for this segment. However, as those buyers are not being affected this time around, it’s now theoretically easier to qualify if you have less-than 20% down! Crazy, right? And you also get better rates on your mortgage if you have less-than 20% down. Why? Insurance. If you’re buying with 5% down, and you can’t pay your mortgage, your bank or lender will go back to the insurer and ask for their money back. Since there’s less risk, they can offer you an easier way in, and better rates.
Who Does This Affect?
The new borrowing rules apply to anyone who is:
-Buying a house.
-Selling a house.
Out of that pool, the new stress test only directly affects those putting 20%+ down. According to some stats, it's estimated that about 85% of people already qualify at the stress test, and lot of us aren’t borrowing to our maximum qualified debt levels. That’s a good thing! Therefore while the media keeps saying how many people it WILL affect (about 16%), I like to focus on how many it WILL NOT affect, as that number is much bigger.
I don’t want to make it seem like the changes won't have far-reaching effects - they will. The question is by how much? At this point, it's too early to speculate.
How To Not 'Stress Out' Over The Stress Test
Let's address how not to get too stressed about these changes:
-Buy a house you can actually afford for the long haul.
-Buy a property with multiple income streams to help you offset the risk and help with the payments.
-Get married (no, really). Either combine incomes and/or co-buy with someone financially.
-Ask help from The Bank Of Mom and Dad, or sister/brother, to either get more down payment (less helpful) or more income on your application (more helpful)
While not all feasible for everyone, these options can indeed help to work around the new rules, and still get you into the property you want. Owning a property isn’t something to be taken lightly and each of these options carry with it some risk, but if you strategize right, you’ll end up way ahead. It's something we must discuss to see if they’ll fit your specific situation.
At the end of it all, I personally do not agree with the way these changes were handled or what they intend on doing. Our arrears rate is less than ½% in Canada. Astonishingly low. Our average credit scores are high. The Federal Government did not give the Ontario Government's Fair Housing Plan enough time to work its way out and our housing market has already seen a bit of a change.
While the new guideline is slated for January 1st, it's likely most lenders won't wait that long to proceed; they'll be aiming to avoid a mad rush of people trying to finance before rules change and artificially inflate the market. So be smart: plan as if they took effect today, and see how they impact you.
If now is the right time to buy for you, let’s all sit down and discuss how we can set up the process to unfold in a smart and prudent way. Then maybe you’ll never be stressed-out about your borrowing and buying again. Ever!
Have questions? Call me at 416-910-4448 or email MortgageJake@gmail.com anytime!
**UPDATE: October 26th, 2017**
I want to quickly summarize for you the most recent news I have as of today.
I also want to note that these changes may evolve and I'd I'll keep updating!.
The following applies to 20% down or more:
1. If you have a pre-approval and you don't buy something (resale) by January 1st (or when all lenders implement the rule changes), you'll be subject under new rules. However we are still waiting on that ONE lender that'll issue pre-approvals today and allow them to close after January 1st. There's always one willing to be flexible and bend policy.
2. If you're engaged in a pre-construction purchase, you should get approved at one of the big 5 banks ASAP (I have an RBC and CIBC contact if you need) just to make sure you'll beat the test. No lender has yet issued any "grandfathering" for old purchases. When I know of some, I'll let you know!
3. If you are buying a resale that has a closing after January 1st you should get that approval NOW. (With me!). The closing date can be anytime after Jan 1st, but the approval must be done beforehand.
4. All lenders can change their drop-date deadline anytime, and move it up before January 1st. We are entering the holiday season, so, let's face it: Bankers don't like to work the last two weeks of Christmas, lawyers are away, underwriters take time off etc. You should hustle if you think these changes may affect you and decide on a lender asap.
5. No matter what you read, credit unions are NOT going crazy and breaking the rules. They've been stress-testing applications for a while now. Sure, there might be some wiggle room but don't expect it to be the best source of financing.
The bottom line, once again, though, is this: the change should not affect more than 10% of buyers (as per many estimates). You may already be past the stress-test due to good income and credit. If you qualify at 5x income, you're good.
I got sick and tired of not hearing anything from the banks, so I called the regulator, OSFI, and they actually told me the above themselves. Cool, eh?
Thanks for reading! Questions and comments welcome anytime. Follow me on facebook to get my most recent rants, too!
There's no question this will impact a significant number of Toronto real estate buyers currently searching for a property to purchase, and potentially cool the market. If you're in the Toronto real estate market, we encourage you to confirm how this new policy might impact your own purchasing decision.
Have questions? Please know we're here to help!
These past Urbaneer blogs are great supplementary reading:
~ Steven and the Urbaneer Team
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