It’s safe to say the entire Canadian Real Estate market and stakeholders were caught off guard by the Federal Government’s new Mortgage rules announced in early October. It’s now been over two months for the Real Estate community to digest and interpret those new rules, and certainly a cloud of confusion still lingers as we adjust to the new reality.
It’s important to understand that the new rules, though restrictive, are there to protect home buyers and maintain a stable housing market. The Federal Government’s intent was to create a ‘soft landing’ in the likelihood of rising interest rates and a possible softening of house prices. These new rules do make it more difficult for buyers to attain home ownership as soon as they may have hoped – the average saving time being about 102 weeks now – but it’s also meant to curb the influx of foreign buyers like the situation we’ve seen in Vancouver.
As a professional, I know what I know; I know what I don’t know; and I know the difference. So to get some clarity, Maggie Cohen of CoCo Mortgages has provided her knowledge and wisdom to the new rules:
What is the new Mortgage Rule?
All insured mortgages will be tested at a much higher interest rate than before. That stress test rate is based on the Bank of Canada's posted five-year fixed rate which is now 4.64%, called the Benchmark Rate (vs. the previous Contract Rate of 2.54%)
In addition, the cost of funding these “un-insurable” mortgages has increased. As a result, we have already seen most major lenders increase their lending rates.
The terminology has been changed with the new rules and are as follows: High Ratio is now “Insurable” vs. Conventional which is now “Un-Insurable”.
What are the Requirements to be Insured?
The requirements of a mortgage to be insured must include, but are not limited to, the following criteria:
- Purchase Price maximum $999,999.00
- Purchase Transaction only
- Beacon Score minimum 600
- Gross Debt Service(GCS) and Total Debt Service (TDS) maximum 39%/44% respectively
- Amortization maximum 25 year
What is Insurable?
- Applicable to all mortgages regardless of your Loan-to-Value (LTV) ratio
- Purchases and Purchase/Port, Transfers, Owner Occupied 2-4 Unit Rentals
- Fixed and Variable Rates
- 1 to 10 year Terms
- Property Value max $999,999.00
- Minimum Beacon Score 600
- GDS/TDS maximum 39%/44% respectively
- 25 year amortization
- Qualify at Benchmark Rate (currently 4.64%)
What is Un-Insurable?
- Applicable to mortgages with greater than 20% Loan to Value
- All Refinances (Lenders are adding a rate premium between 15 to 25 basis points)
- Purchases, Purchase/Port, Transfers, Single Unit Rentals
- Purchase price above $999,999.00
- Switches with no transferable insurance
- Qualify at the Contract Rate (5-10 year term)
- Qualify at 25 year amortization
The bottom line:
We will see many borrowers’ purchasing power reduced by 15 to 18% and we could see an increase in interest rates to offset the cost of funding un-insured mortgages.
Previously, a borrower qualifying for a purchase price of $500,000 (based on qualifying the borrower at the Contract rate of 2.54%) now qualifies for a purchase price of $418,000 (based on the benchmark rate of 4.64%). So the new rules have effectively reduced their purchasing power by 16%. This will especially have an impact on First Time Home Buyers getting into the market.
The silver lining:
Home Ownership is still a realistic goal! Working with a trusted Realtor and mortgage advisor will help carve out a plan that works best for you – and potentially get you into a home sooner than you expected.
The rules may leave you with more questions than you had before and a thorough consultation with one of our team members will allow us to understand your Real Estate goals and assist in the best plan moving forward. Give us a call and let us show you how we can help.