What Canada’s new mortgage lending rules mean for home buyers
For most people, buying a home is a necessary stage of adulthood. Owning a property in a good neighbourhood, you’ve been told, is something you should strive for. It’s something that’s important if you want to raise a family. So you go to school and land a good full-time job with a positive career outlook and a respectable salary, and you start saving for a starter home or new condo.
Maybe you’ve been saving like this for years, and maybe you’re ready to finally make a down payment. But wait—starting on October 17, the Canadian Government will be changing the rules regarding mortgage lending, and it could mean that you’re out of luck for now.
Here’s what Canada’s new mortgage lending rules mean for home buyers.
What are the mortgage lending changes?
There are some important adjustments coming that are intended to limit foreign real estate investment, especially in burgeoning areas like Vancouver and Toronto, where housing values have gone sky-high. The changes close a loophole that allows foreign buyers to earn a capital gains tax exemption if they claim a property as a principal residence (even if the property in question is not their principal residence) and sell that home the same year they buy it.
The second change, and the one that concerns new home buyers, involves mortgage lending. Currently all mortgages, insured and conventional, are stress-tested for all variable rate mortgages, and fixed mortgages with terms between one to four years. After October 17, all insured or high-ratio mortgages (where the down payment is 20% or less than the value of the property), including five-year fixed mortgages, will be tested against the Bank of Canada’s five-year fixed term mortgage rate. The trouble is, BoC’s rate will approximately double what your mortgage lender uses to qualify you for financing.
Why make these changes?
The loophole-closing change isn’t so much a new law as it is cracking down on the laws that already exist. Experts think it’s a necessary step to prevent a housing bubble. The stress-test aspect of mortgage lending was put in place to prevent a future housing correction.
“This will have the most impact in smaller markets and homes under $1 million. However, it may take some time to see the effects – they might not become apparent until the Spring market in 2017,” says Adrian Williams, a mortgage broker in Toronto. “Keep in mind that these changes don’t come as a complete surprise. There have been hints that changes were coming, and I’m sure there will be more in the future,” he says.
What does this mean for new home buyers?
If you’ve been saving for your first home, you might feel like you’ve had the rug pulled out from under you. What you thought would be enough of a down payment to buy a home might not be enough once you’re stress tested by the Bank of Canada’s five-year term, which currently stands at 4.64%. For comparison sake, the big banks charge around 2.5% on a five-year fixed term.
For example, let’s say you have $100,000 yearly income and you’ve saved $40,000 for a down payment. Under the old lending rules, you could be eligible for a mortgage up to $665, 435. Under the new rules, however, you could only get a mortgage of $505,762. That’s 24% less than before.
If you still want to buy a home, you have a few options in response to these new rules:
- Buy a smaller home
If you qualify for a smaller mortgage with your current means under the new rules, you could always just look for a smaller home with a smaller price tag.
- Buy in a cheaper neighbourhood
The new rules make it harder to qualify for loans in high-value areas, so you could look at other neighbourhoods where the real estate is a bit cheaper. This might mean you’re a little further away from work than would be ideal, but at least you can still enter the world of homeownership.
- Earn more money
If you don’t need to buy right now, you can always wait for a salary increase and save more for your down payment in the meantime. One you earn more money you might pass the stress test without having to go smaller, or to a different area.
The good news is, these changes might help curtail the rising prices in major cities across the country (and from that perspective, it was only a matter of time until changes like these were put in place). Unfortunately, though, if you’re a first-time home buyer, the mortgage lending changes might also keep you out of the market longer. The best you can do is understand how these changes affect you, and adjust your home-buying plan accordingly.