Mortgage Rules with Darlene Hanley
As we kick off 2018 and begin goal-setting, many Canadians will have their sights set on buying property this year. However, the new mortgage rules that came into effect as of January 1 may have some waiting a little longer than expected.
As always, I like to pass along industry knowledge and advice from those who know it best! This month I’m fortunate to have Darlene Hanley of Hanley Mortgage Group weighing in on the new rules and what it means for prospective buyers. I hope you enjoy the insights, and please reach out if you have any questions!
As of January 1, all borrowers will now have to pass a “stress-test” using the minimum qualifying rate equal or greater to Bank of Canada’s five-year benchmark rate (4.99%) or lender rate +200 base points (2%). This will significantly impact the overall amount that buyers are approved for, and therefore impact their search.
As an example, a couple with household income of $120k want to purchase a $1MM home with a 20% down payment ($200k). This would mean that they need to qualify for a mortgage of $800k. While they may have qualified for this previously, with the additional 2% stress-test, they now only qualify for $650k, putting that home out of their buying range. “Refinancing works the same way,” says Darlene, “with borrowers now qualifying for 17-20% less in financing than they would have before.”
Those who have mortgages coming up for renewal will also need to pass the stress-test if they are hoping to shop around. If a borrower is right at the cusp of their buying limit and cannot pass the test, they won’t have any choice but to stay with the lender they are currently with and won’t have the opportunity to negotiate their rate. In this case, the lender will simply auto-renew.
These new rules will surely have an effect on affordability for many buyers, bringing overall qualifying mortgage levels down. After a very competitive year in the real estate market, many buyers were already looking at purchasing homes toward the higher-end of their pre-approved limit. In doing this, it leaves little to no room for the stress-test cushion, or for closing costs and unforeseen expenses upon move-in. For first time homebuyers, this can present a real obstacle, especially when sights have been set on a desired area or property-type that is now out of their price range.
So, what are the options for first-time buyers who may be feeling frustrated? “Save, save, save!”, says Darlene Hanley. “It may feel discouraging not being able to afford to get into ownership sooner, but buying right up against approval limits with high debt-ratio isn’t a good option either, which is why these new rules have been put in place.”
Some buyers may need to adjust their expectations in order to get into the market. This might mean buying a different type of property than they had originally envisioned. Depending on comfort level, this might require a bit of elbow grease and willingness to start with a home that requires more work over the long haul, including remodeling and renovation projects that can be approached over time.
For many, it could also mean considering different markets adjacent to the original search area. “While prices in large urban markets like Toronto and Vancouver will likely remain competitive or at least plateau, surrounding cities may see a decrease in prices and be more accessible for first-time buyers to get into,” notes Darlene.
Will we expect to see lots of help from Bank of Mom and Dad? “Perhaps, if they are in the financial situation to do so. Parental support in qualifying for a mortgage comes in the form of gifting.” Parents would need to sign a “gift” letter declaring that a lump sum of funds are being given to a child with the intention of purchasing a property, and that it is not a loan to be paid back. While we might see more of this to allow first-timers to get into the market, it important to remember that these changing mortgage rules and market conditions affect all generations. If overall prices are going down, this could mean Mom and Dad’s $2MM home is now only worth $1.6MM which affects their overall estate value and retirement portfolio.
While it might feel challenging and inconvenient for those trying to break into the market, ultimately the Bank of Canada is trying to protect our biggest assets. “This stress test is designed to create a cushion for “what-if” scenarios,” Darlene cautions. “Canada is quite conservative and we have one of the strongest banking systems in the world. And while 2% might seem a bit extreme, we need a stable market in which Canadians can buy with confidence and afford to stay in the homes that they’ve purchased.”
Not quite ready to buy yet? If renting is the right interim solution for you, I’d love to help! I’ve found some amazing rental properties for clients in recent months and there are plenty of gems to call home while you save for your purchase. One thing to remember is that, prices in the market will continue to change, but qualifying for a mortgage is always going to be based upon income and down payment. This is why it’s so important to be financially planning for the future, whether you are a hopeful buyer or current homeowner looking to expand or refinance.
In one of our next articles, we’ll connect with a financial planner to provide some recommendations for maxing out RRSPs and taking advantage of other saving strategies to get you in your dream home faster!