On October 3, the federal government introduced new mortgage qualification rules which take effect October 17. If you or someone you know is a potential home buyer, you should read on.
I think everyone knows that the housing markets in Vancouver, Toronto and, to a lesser extent Victoria, are overheated.
Both the previous and current federal governments have been increasingly anxious to cool these markets down, before interest rates rise and cause a major house price collapse, when it becomes obvious that many homebuyers could not afford the home they purchased with borrowed money at record low interest rates.
The next phase of these rule changes takes place suddenly on October 17, 2016. While these are aimed primarily at those very hot markets and will have the greatest effect there, don’t be surprised if some potential homebuyers in Manitoba suddenly find themselves disqualified from homes they had their eyes on.
The old rules required a buyer to qualify for a mortgage based on their current debt load and ability to make the mortgage payments based on the interest rate available. Currently, mortgages are available in the 2.2% range if you negotiate well, plus or minus for different terms.
Under the new rules, there must be a “stress test”, measuring the buyer’s ability to make payments at the higher of the negotiated mortgage rate or the Bank of Canada’s five-year fixed posted rate. Unfortunately, that BoC rate is currently 4.64%, so that becomes the rate under which a homebuyer must qualify.
These new rules apply to “insured” buyers, ones who require mortgage insurance because they have a down payment of less than 20% of the purchase price.
Mortgage insurance protects the lender not the buyer, though the buyer pays. A buyer that puts down 20% or more as a down payment generally does not need to pay for mortgage insurance.
In scenarios prepared by RateHub.ca for the Globe and Mail last week, a family with a $40,000 down payment and $50,000 of pretax income would qualify for a $277,000 home under the old rules, but only a $222,617 purchase price under the new rules.
A $100,000 pretax family income (still with a $40,000 down payment) would have qualified for a $650,000 house previously. Under the new rules, the maximum purchase price was estimated at $512,133.
You can see why I think this may affect the Winnipeg market, as well.
Other federal rules introduced in the last few years require that buyers must have at least a 5% down payment on the first $500,000 a purchase price and 10% down the remaining purchase price, up to $1 million. These amounts still require the buyer to pay for mortgage insurance.
If the home is valued at more than $1 million, a 20% down payment is required on the full value, as mortgage insurance is not offered on homes above that price.
Go to www.cmhc-schl.gc.ca for the full rules, guidelines on total debt service, closing costs and helpful calculators.
Last month BC introduced a 15% tax on foreign buyers, which may be slowing the market there. Ontario is talking about measures to cool its housing market, as well. Maybe all of these steps will result in an orderly adjustment back to affordability, rather than the market crash that some foreign analysts keep predicting.
If you would like to see an article analyzing the relative benefits of renting versus buying, drop me an email.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is a Certified Financial Planner and senior advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.