The Biggest Change: First Time Home-Buyers will Qualify for Less
Buyers with less than 20% down payment will qualify for 20% less financing. Previously a client could be qualified on the actual fixed mortgage rate they chose as long as that term was for 5 years or more. If the term was less than 5 years or a variable rate, the client would need to demonstrate they could service the mortgage at the Bank of Canada Qualifying Rate. That rate is currently 4.64%. With 5-year mortgage rates at the 2.40% level, if a client needed to qualify for a higher mortgage they would take a 5-year fixed rate in lieu of a variable rate or shorter term.
Effective October 17th, regardless of the term, anyone with less than 20% down payment will have their mortgage application approved based on the 4.64% rate. With house prices out of reach for many first time home-buyers, this change will make it more difficult for those with less than 20% down to qualify for a home unless there is a corresponding drop in real estate values.
The Cost Of Mortgages is Going Up – And Soon
The Bank of Canada would normally increase interest rates as a mechanism to cool the housing market. Given the relatively fragile state of our economy they cannot do this without affecting the other parts of the economy. Canada is technically in a recession: June was the worst month for the economy since the recession of 2009.
Instead, other policies such as shifting the cost of mortgage insurance to lenders will result in either higher mortgage rates or fees associated with obtaining a mortgage. This will likely lead to a less competitive mortgage environment as smaller lenders may be forced out of the market. The impact of this remains to be seen. Details can be found here.
Foreign Buyers May Stay Foreign
All levels of government have been seeking ways to limit the participation of foreign buyers in the housing market. The federal government joined the regulatory foray and will eliminate the capital gains exemption previously available to foreigners who were able to claim a primary residence exemption. This announcement, in addition to the recent BC government property transfer tax rules will no doubt have foreigners looking to other jurisdictions or avenues (pun intended) for their capital investment.
Some lenders, in a move that is long overdue are vastly increasing the amount of due diligence on mortgage applications for many non-residents which adds another barrier to investing in Canada. Details can be found here and here.
How Can We Help?
Lenders will be quick to adapt to these new rules and there will certainly be clarification and amendments forthcoming. Partnering with industry experts who can help you and your clients navigate through these changes is now more important than ever. Educating buyers on ways to increase their down payment though a disciplined savings plan or leveraging existing real estate holdings and investments is something that we do on a daily basis. Independent Mortgage Consultants offer choices. With access to over 60 different banks, credit unions and mortgage lenders we have the means to assist almost every client in finding a mortgage solution tailored to them.
The next few months, and specifically Spring 2017, will be a test of the new Canadian mortgage lending environment. The silver-lining here is that these changes are bound to create incentives for lenders, home builders, and governments to find a realistic solution to help average Canadians afford a home (not an investment).
Changes need to be tested and this shot-gun, knee-jerk approach will inevitably result in a middle of the road solution to solve the Great Canadian Housing Crisis once and for all. The pendulum does swing both ways. Then, we can all focus on hockey.