Doom and gloom for Oct. 17th…Maybe not!
You heard correct. A little bit of doom and gloom headed your way on Oct. 17th 2016 if you are a homebuyer… or potentially as a seller for that matter. But, hang in there, let me introduce the light at the end of the tunnel. Honestly!
The Government of Canada shocked the mortgage and real estate industry introducing new legislation for high ratio mortgages. This affects anyone that is looking to buy a home without 20% down.Â (For the full article, click here)
The new rules will force all buyers to go through a â€œstress testâ€ making them qualify for their new purchase on the 4.64% benchmark rate. That means regardless of the term, bank, or interest rate you receive, you will need to qualify for that mortgage as if the rate was 4.64%. If it doesnâ€™t seem like a big deal, it actually is quite dramatic.
It can reduce your purchase power (qualification) by up to $100,000!
In other words, if you were pre-approved for $400,000 price currently, after Oct. 17th, 2016, it may only be $300,000. That is quite the swing! If you currently have a pre-approval with your bank, broker, or me, you should probably review that right away to confirm what your new pre-approval will be.
If you want to sneak in just before the new rules take effect, you would need to make an offer and have a live mortgage submission to a lender or bank before Oct. 17th.
Question: Waitâ€¦what were the old rules?
Answer: Almost identical!
As of right now, and for the past couple years you could purchase a home with less than 20% down and use the actual rate you wanted to qualifyâ€¦ if it was a 5-year fixed. Any other product or term chosen needed to be qualified on the benchmark rate (currently 4.64%). That includes HELOCâ€™s, 1-4 year fixed, 5-year variable rates, etc. Everything but a 5 year fixed was needed to be qualified on a benchmark posted rate.
The good news is, most homebuyers will not feel this change at all.
Those that will be hurt by this, will likely be first time buyers and those on a budget that know they can afford the payments, but are maxed out on qualification. The difference? One you determine (affordability), the other the bank determines (qualification).
Out of those first time buyers and those on a budget/fixed income, they may be just fine too! I find that when I meet with individuals, and couples they are typically conservative on their first home purchase. If I pre-approve them for $500,000, they end up purchasing closer to what we discuss is a healthy monthly payment, which is often much less.
The unfortunate thing will be for those single income families that know they can make it work and need to make it work for home ownership, but just got priced out and qualified out. If they could afford $200,000 before, it now is closer to only $160,000. This is a game changer for some in the negative way.
The result of some families being priced out will most likely not happen in the booming and wealthy cities but in the average, every day communities. Especially for Alberta that is already feeling the downturn of oil prices. This could slow sales up further, drive down prices, and bad news for sellers. Which is not the point of this new policy. For this reason alone I am not a fan of the policy because it is the rest of Canada that was doing just fine and not needing regulation on controlling affordability. The major centres such as Toronto and Vancouver need to be reeled in on their over heated market and this policy is made for them… but includes us all.
Amongst all of the negatives, here is a summary of the positives:
- The only real change taking place is making qualification consistent regardless of the term you choose. 1-10 year fixed is qualified on the benchmark rate. This will affect a small percentage of buyers.
- You will probably still qualify for the purchase price you wanted anyways. Good chance you did not need to max out in the first place.
- Economic safety. This will make everyone financially safe and stronger as a whole. Now we know that we are all able to â€œqualifyâ€ for rates around 4.5% and less. This will confirm the strength of the Canadian buyer when getting approved.
- This does not affect 20% down/conventional mortgagesâ€¦yet.Â
- During the 2008-2010 crisis, I saw amortization drop from 40 years to 25, which we all thought, was earth shattering! Literally. I cried every day planning on the impending doom. Turned out everyone carried on as planned.
- This may help slow and regulate Toronto and Vancouver. Maybe?
- The positive to a reduction in housing demand and value, is increased affordability for home buyers despite the increased qualification criteria. Would probably be a wash.
With every negative, there is a positive opportunity.
Keep your eyes peeled in the months ahead as Iâ€™m sure there will be a great opportunity that is created out of these policy changes. Maybe the rental market will increase and demand will create cool opportunities for investors and first time landlords?
Thanks for reading this book of a blog post. Yikes!
P.s. If you want to apply to see what you can qualify for now and after October 17, 2016 click here. Oh, and remember to subscribe to my blog!