HARDER TO QUALIFY WITH 50% DOWN THAN WITH 5% DOWN.. DOES THIS MAKE SENSE?
October 2016, our Federal govt announced a number of new mortgage rules including the infamous new ‘stress test’ for all insured mortgages. Mortgage default insurance is required for all mortgages greater than 80% loan to value. You have to qualify at the bank posted 5 yr fixed rate, which is usually around 1.75% to 2.00% higher than your actual rate, and with a maximum amortization of 25 yrs max.
These ‘rules’ were brought in last year to protect us from ourselves. To ensure we could handle any large interest rate hikes at renewal time. Sort of like big brother watching over us to make sure we don’t borrow more than we can afford. (btw, we already had lending rules in Canada. Our mortgage arrears were and still are at record low levels. Seems like our Banks, credit unions and other lenders are doing a pretty good job of lending. Is more govt intervention necessary? Most experts say no.)
Today, Jeremy Rudin, OSFI Superintendent, joined the party…. well, more like rained all over ever Canadian homeowner’s party (current and future). OSFI, not wanting to be left out, announced they would impose more mortgage rule tightening for all mortgages that were UNDER 80% loan to value. Again, to protect us from ourselves just in case interest rates should sky rocket at your renewal time. Here’s a summary of the changes and how they will impact consumers, homeowners, and the real estate market:
- A new minimum qualifying rate for uninsured mortgages. The ‘stress test rate’ will be your contract rate + 2.00% or the 5 yr posted fixed rate, whichever is greater.(that’s right, your may have to qualify at a higher rate than those with insured mortgages above 80% loan to value.. how does that make sense?)
- Federally regulated financial institutions must establish and adhere to appropriate Loan to value limits that are reflective of risk and updated as housing markets and the economic environment evolve (yeah, I’m not quite sure what this one means either.. stay tuned)
- Federally regulated financial institutions are prohibited from arranging with another lender a mortgage, or combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum Loan to value ratio or other limits in its residential mortgage underwriting policy. (this has dire consequences for those that won’t meet this historic new ‘stress test’.. effectively, the govt is telling you to not buy a home if you don’t fit in this new shrinking qualifying box…. or sell your home if you need to access the equity..)
HOW THIS AFFECTS YOU
- buying with less than 20% down payment, no effect. You already have a ‘stress test’.
- buying with more than 20% down and you’ll have to pass a tougher test, that’s right, a tougher test than those with less than 20% down. (Make any sense to you? me neither.)
- around another 15% of homeowners will NO longer qualify for a mortgage regardless of it being a purchase or if you wanted to refinance.
- expect rental, condos or houses to become way more expensive as demand will spike.
- we’ll see a spike in real estate sales from now until Jan 1st as homebuyers will scramble to get in prior to the new rules taking effect.
- most credit unions are provincially regulated and for now, won’t be affected.. (that could change if the provinces amend their rules)
POSSIBLE SOLUTION TO DISCOURAGE HOME SPECULATORS BUT ENCOURAGE HOME OWNERSHIP
If you want to discourage speculators, make them hold the property for 5 or 7 years. Bring in a declining speculation tax for anyone that sells a non-owner occupied home in less than 5 years. Reward those that hold real estate for longer periods. You’ll have less transactions. Encouraging longer holding times, more rental units on the market and higher vacancies. More rental supply will also resolve high rents. Bring back more realistic mortgage qualifying guidelines. Encourage and promote buying investment properties.
A year ago, the Federal govt made several rule changes that effectively made it more expensive and difficult for consumers to borrow. The list of changes was so long that most Canadians didn’t bother to react because it didn’t affect them that day. But as we are seeing now, more consumers are experiencing reduced access to mortgage money. They can’t refinance their mortgage. They can’t draw on their built up equity in their homes. It’s only when you need to borrow do you realize the extent of the changes. Each and every one of us will be impacted. These new policies will only make home ownership more difficult. It will also slow our economy.
Perhaps the credit unions can pick up the slack and help … stay tuned.. there will be more to share on these changes. One thing is for certain. You need to speak with an experienced Mortgage broker to understand what your options are. It’s almost impossible to go it alone.. and you don’t have to. Mortgage Brokers work for you, not the Bank. They have access to dozens of competing lenders.
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 firstname.lastname@example.org