New mortgage rules could make it harder to buy homes, analysts say
The minimum qualifying rate to secure a mortgage is being expanded to people who have a down payment of 20 per cent or more
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The government’s tightened mortgage rules could make it harder for first-time buyers to purchase their dream home, according to real estate experts.
Previously, anyone with a down payment of less than 20 per cent had to meet higher financial scrutiny. But under the change, which took effect on New Year’s Day, the same rules will apply to everyone, in theory, to prevent customers from borrowing beyond their means.
“Right now if you go to the bank and get a mortgage, they say your credit looks good, you’re approved, your interest rate is three per cent,” said Eddie Castillo, an Edmonton-based realtor with Century 21 A.L.L. Stars Realty.
"Even though you’re actually only paying three per cent on your mortgage, you have to qualify in an imaginary world that you can pay five per cent interest rate."
Now, regardless of their finances, all buyers will have to prove they're eligible for what's known as the minimum qualifying interest rate.
It must be the greater of the five-year benchmark rate published by the Bank of Canada (currently 4.99 per cent) or the contractual mortgage rate (+2 per cent on top of whatever the bank offers).
Previously, the stress test was limited to those who had a down payment of less than 20 per cent, which required a person to secure mortgage insurance with Canada Mortgage and Housing Corporation.
In an email, a spokesperson for the Office of the Superintendent of Financial Institutions Canada said the government made the change due to “record levels of household indebtness and vulnerabilities in some housing markets”.
“We are not waiting to see those risks crystallize and turn from vulnerabilities into hardship; rather, we are adapting our standards to the evolving housing markets and economic environment,” the statement said.
Michael Ferreira, Managing Principal of real estate data group Urban Analytics, said the change essentially results in an 18 per cent reduction in “buying power”, which is the amount a person has to put towards their mortgage after bills and expenses.
“It’s going to impact primarily the younger, entry-level buyers and some move-up buyers who are looking to perhaps sell a condo or smaller townhome … from that perspective, those people are going to have less funds to play with,” Ferreira said.
The new rule applies across the country, but Ferreira said it was instated to “cool the market” in overly hot markets such as Toronto and Vancouver.
“That’s the challenge. It’s essentially Vancouver and Toronto that have the flu but the entire country gets the medicine,” he said.
Castillo said the government made the change to ensure people can afford their mortgage payments. If that leads to fewer foreclosures, it will ultimately create a healthier housing market.
But he doesn’t necessarily agree with it being applied to the whole country.
“Right now in Edmonton we are in a very depressed market. So I think what you’re going to see is a lot of people not buying a home now,” he said.
That might be good for landlords, as people may stick to renting. The new stress test doesn’t apply to credit unions that are not federally regulated, which may make those a more attractive option for those seeking a mortgage.
While some may just buy a cheaper home, Castillo suspects many will refrain all together.
“Now that guy who was approved for 350K who could afford a duplex, and can now only afford 275K … might pull out of the market all together.”