By now, most of you will be aware that the Federal Government announced changes to our current mortgage rules, effective October 17th. As is usually the case with such announcements, it was immediately followed by a plethora of reactions, articles, over reactions, and (for lack of a more technical term) hoopla. As a mortgage agent, it meant a busy few days of contacting clients, reassuring those who had deals they were fine, and letting others know how it would impact them. Now that we have all had time to digested these proposed changes, let’s look at what they REALLY mean.
While there are a few different changes forth coming, such as closing tax loopholes for foreign investors, I’m going to focus on the part of the announcement that will impact the greatest number of people. As of October 17, all applications for a CMHC insured fixed mortgages will be “stress tested” against the Bank of Canada’s posted five year fixed rate of 4.64%. Even though the majority of five year fixed rate mortgages are currently getting interest rates that are over 2% lower than that, the goal is to protect the buyer against rate increases or sudden income loss. Keep in mind, this is only on CMHC insured mortgages. For the most part, that’s mortgages with less than 20% down payment. It’s also important to note: These new rules will not affect your ability to get approved for a mortgage, just how much of a mortgage you can afford.
The first question most people ask when hearing this is, “If I have a fixed rate, why do I need to be protected against rate increases?”. It’s a valid point. What I believe isn’t being explained well here, is it’s not just protecting your current mortgage, but your future mortgage as well.
Many articles have broken down the numbers and stated that, based on the new rules, buyers will get approved for 15-20% less. This is true. But they tend to neglect the other shoe, “Will you STILL be able to afford your house at renewal?”
Currently, a buyer getting a mortgage on a $500,000 house, with a 5% down payment and 2.39% interest rate, will have a monthly payment of $2178.00 plus property tax. While they may be locked into that for the next five years, what happens if rates go up significantly in those five years?
At renewal time, the balance of the mortgage would be $415,577. Let’s say, for the sake of the example that the new five-year rate is now 4.64% (equal to the “stress test” benchmark). The monthly payment at the time of renewal is now $2,333.00 plus property tax. They buyer is paying $155 more per month on a lower principle.
Whether or not interest will climb that much in the next five years is debatable, but I think we all recognize that they will start to increase at some point. This is the governments way of insuring that, when they do go up, we don’t end up with the housing market catastrophe experienced by or neighbours south of the border.
So what will the impact of all this be? It’s hard to generalize due to real estate being location specific. Some claim it will keep potential buyers out of the housing market. I think there will be a very small group it impacts in that way. But, for the most part, it just means people will be a little more limited in the houses they can look at. Many first time buyers will not be able to go into a detached home, and instead have to opt for a townhouse condo. Use it as a way to build equity before taking the next step.
Will it affect prices? It’s too early to say. However, keep in mind that the low mortgage rates are only one small factor behind what drives housing prices. A much bigger factor is supply and demand. There are simply more buyers than sellers right now. These new rules don’t change that- they just changes the price point buyers are looking in. It could be argued that more buyers will be looking in the $300.000-$400,000 range, which would drive up the prices of those houses. All we can do is wait and see.
What we can say with certainty is that these new rules form, while seemingly inconvenient now, will do a great job of ensuring Canadians will not become “house poor”, or be forced out of their homes should rates spike before renewal time. The intent is admirable in theory, and years from now may be viewed as a stroke of brilliance. But, like every other decision of this type, we have to take a ‘wait and see’ approach.
As always, if you have any questions, feel free to email me at email@example.com …and please “like and share”. You never know who it may help.