Last call for mortgage approvals under the current rules….and an in-depth look at how these new rules will impact YOU in 2018.

 TIME IS ALMOST UP..

With just days to go before the new mortgage rules take effect on January 1st, we are seeing a flurry of mortgage applications.   Panic buying and refinancing is at its peak. And rightfully so..  next year, you will qualify for at least 15% less mortgage.

(TIP… get a preapproval before Dec 31st and it will remain valid for 120 days from the date of preapproval. You do not have to enter into a purchase agreement before Dec 31st.  And if refinancing, you don’t have to close prior to Dec 31st. This is not with all banks.  Call my office for more info.)

LET’S BEAT UP ON THE SELF-EMPLOYED SOME MORE

How about the self-employed person that must qualify on their net income after taxes?   Everyone (salaried and self-employed) show lower net income after you deduct taxes.  But, did you know that salaried or hourly employees qualify on their gross income, not their net?  Yup, that’s right.  Self-employed individuals must qualify with their net incomes.  (I believe the Federal govt referred to these people as the so-called tax cheats or people that are getting away with not paying their fair share of taxes as we’ve recently heard from our govt)

Over 15% of self-employed individuals can no longer qualify.  Not because of their true ability to pay, but because of the new rules.  Many of these entrepreneurs leverage their life savings, their homes, to borrow to invest in their business.    These people will be forced to look elsewhere for funds. You can be sure they will pay a higher interest rate.  Self employed are the backbone of our country, yet they are being made to feel like crooks or 2nd class citizens.  This is a “made in Canada challenge” that just isn’t necessary.

LET’S NOT FORGET OUR SENIOR CITIZENS OR THOSE APPROACHING RETIREMENT AGE

These rules will push that retired home owner, living on a pension, with a $600k home that wants to take out a $200k line of credit or mortgage so they can live their remaining days in their home… This person will now be forced to sell and rent or compete to rent in a market that has seen sky-high rents (recent report shows Barrie, Ontario’s average 1 bdrm apartment costs over $1200/mth and 2 bdrdm over $1600/mth.  Yes, Barrie!!).

I have a client.. (this may sound like you or someone you know).   She is a self-employed cleaner.  She has saved all her life.  Has a condo worth $450k.  She has a very small mortgage of $75,000 which she can easily afford.   She has a little cash in the bank and a small pension of $35k annually.  But it’s enough for her to pay her bills, food, housing costs and even some entertainment.  She wants to have access to money in case of a financial emergency.

In years past, I would have been able to get her a secured line of credit for $150k to $200k easily.  Her payments on a such a facility would be around $31/mth for every $10,000. Lenders are happy to extend credit to someone that has so much equity in their homes.  The risk of default and loss are nil.

But in today’s crazy world of credit, I have to tell this woman she can only qualify for an extra $25k to $30k at most.  Most Lenders don’t even want to do mortgages or secured lines of credit for such a small amount.  Minimum amount is $50k to $75k.

At this point, this client will have to consider selling her condo and renting.   I know what some of you are thinking.  That “it’s not a bad idea.”  “She can’t afford to stay in the condo”. Oh yeah?  Try finding a place for $1200/mth in the GTA.   This woman can afford to stay in her condo.. but because of the new rules, she is being pushed out and will most likely have to sell and rent.   The rental market in the GTA has never been hotter.   We’re seeing reports of bidding wards to rent.  Air BnB is having a huge impact on the rental market.

How long can this retiree afford to rent?  How long before her money runs out?  This only started becoming an issue just a few years ago.  It was never a problem before.  This is a “made in Canada problem”.

WHY ARE THEY DOING THIS NOW?

The rules are intended to eliminate consumers from qualifying for a mortgage.  They want to ‘curb our enthusiasm for debt’.   Canadians have too much debt, right?  Something we’ve heard over and over again in the media.  (You hear that?  It’s a stampede of real estate pessimists and fear mongers coming out of the woodwork again..just beware of their rhetoric.)   Look, real estate prices have increased at an alarming pace over the past 2 years.  No argument. I’m the first to say prices were increasing way too fast.  I’m glad it’s become a more normal market in the past 5 months.

We’ve already brought in several huge mortgage rules over the last 12 months.  Do we really need even more mortgage tightening today?  I say NO WAY! And so do most financial experts.

MY TAKE ON THESE LATEST CHANGES

I’ve been struggling with trying to find something positive or optimistic to say.     Personally, I don’t agree with these new tighter guidelines.  We haven’t seen the full effect of the Federal and Provincial govt changes that were brought in last year and earlier this year.   It makes little sense to bring in these changes, now.   The tighter lending rules brought in over the last 2 years have already gone too far.

The reason we had a big spike in home sales earlier this year was due in part to the rule changes last Fall/Winter.  Buyers were rushing to get in before the rules came into effect.. before they couldn’t qualify.  Higher sales contributed to buying frenzy and higher prices.  A domino effect.  It was not until this summer did we begin to see sales slow and prices drop along with the fewer sales.  The rules were finally starting to take effect.

The Ontario provincial govt and Premier Kathleen Wynne brought in a 15% foreign buyer tax along with new rent control rules that capped rents for all rental properties.   This resulted in less rental units coming to the market due to lower or no interest in new purpose built rental buildings coming to the market.   Less supply of rental units has contributed to exploding rents and a huge lack of supply of rental suites.  Private investors and foreign buyers have stayed away from buying real estate in the GTA due to the new rent control regulations and tax implications.

A POSSIBLE END RESULT….

Fewer Canadians will be able to access a mortgage. This is fact.  We will see fewer Canadians realize the dream of Home ownership. This is fact.   Accessing the equity in your home shouldn’t be frowned upon.   Smart borrowing should be encouraged.  As a Consumer advocate and Mortgage Professional, I can tell you that a huge percentage of Canadians are borrowing wisely.  They are investing in Canada through businesses, real estate and into the stocks.  They are working to build wealth.  Wealth doesn’t have to be a dirty word.

We should not discourage investing in real estate.  It should be promoted as a way to put a roof over our heads and also a sense of pride.  There’s an old saying among Mortgage Lenders… “pride of ownership”.   It means those that own their homes go that little bit further to take care of what they own.  Real Estate should be encouraged as a safe and secure long term investment.   Real estate should be bought as a long term goal.  This is where our laws and guidelines should be focused.

Let’s hope the real estate markets do no have a collapse.  This would be disastrous for everyone.. even those that don’t own real estate.  Let’s hope the govt will reverse some of these tighter rules and lending regulations.   I’m staying optimistic on real estate.  It’s still a great long term investment.   I’ll be watching and reporting.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@canadamortgagenews.ca