On the 3rd of October 2016, Canadian Federal Finance Minister Bill Morneau presented a substantial list of changes to mortgage policy. While the argument has been made that the Canadian real estate market can benefit from new rules meant to temper the hectic influx of foreign money, these regulations will have an impact on local home buyers as well.
We’ve asked Vancouver mortgage expert Angela Calla how these changes will affect all sectors of the real estate market, including Canadian mortgage. Here are her insights on the matter:
What do the new mortgage rules mean?
The first and most important consequence of this policy change is the fact that borrowers now have to qualify at a higher interest rate than what they’re actually getting. Previously, the only “stress test” that was done this way was for variable rate mortgages and for any mortgage terms less than 5 years in length. Now, 5-year fixed mortgages will be qualified at the current benchmark rate of 4.64% (Bank of Canada 5-year Posted Rate).
This means it will now be just as difficult to get a 5-year fixed rate as it is to get a variable or shorter term mortgage. Also, all mortgages will now have to be qualified at a 25-year amortization, even if the borrower takes a 30-year amortization on their mortgage.
Long story short, getting a mortgage will be more difficult.
Who’s affected by the new mortgage rules?
Here’s a breakdown of how these new market trends will affect borrowers and lenders. The Canadian Department of Finance has published a technical guide on the new set of rules, which explains who will be impacted by them at length, but the gist of the issue is this:
- Mortgage applications completed by the lender prior to October 17th 2016 remain unaffected;
- Pre-approvals however, may be void after this set of changes comes into effect. You will definitely have to re-check your eligibility in terms of purchasing power.
For example, even if you have a 20% down payment, you may have to qualify using a 25-year amortization instead of the 30-year used to qualify you previously. This means that if you were pre-approved on a 30-year amortization, that pre-approval will be void after the changes come into effect.
The purchasing power needed to get mortgages is also addressed by these changes. Before, a household income of $80,000 would qualify you for a mortgage of about $500,000, using a 5-year Fixed Rate qualification. Starting October 17th, you will need a household income of $100,000 for that same mortgage amount.
What’s the bottom line on Canadian mortgages now?
If your mortgage application hasn’t been finalized yet, you’ll have to check whether these changes apply to you. There will be a ripple effect, which will affect property value and borrowers’ ability to refinance. However, interest rates for mortgages are still expected to remain near record lows – only the qualification requirements are rising.
The reason why these changes are being implemented is preemptive – if the market changes and rates increase, it will be harder for existing Canadian borrowers to say they can’t afford the mortgages for which they were approved. This is because from now on, they will be qualified for much higher rates than what they’re actually receiving from lenders.
The Moral of the Mortgage Story
In today’s market, when guidelines are changing at a blistering pace, choosing a mortgage application completion date of more than a month away can be very risky. In addition to that, it would be wise to consult an independent mortgage professional. They are at the forefront of industry changes and have access to multiple lenders and options. This allows for more clarity and better strategies for any mortgage that you’re looking to obtain.
Expert insights brought to you by Angela Calla, mortgage broker with Dominion Lending Centres, and host of The Mortgage Show on Vancouver’s CKNW radio news station.