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This week the Federal Government announced that there will be changes regarding mortgage qualifications as of October 17, 2016 and November 30, 2016. (for matters explained below)
Why it will matter to you:
If you’re a seller, it is aimed to help bring down prices in the market and also lower the demand for properties, thus reducing the likelihood of a multiple offer scenario. In short:
Forcing all insured borrowers to prove they can afford a payment at the posted rate (4.64%) will remove up to 15-20% of buyers from the market, say lenders.
First-time buyers and those with higher GDS/TDS ratios no longer qualify for the mortgage amount they want.
–> Why should you sell now?
– With the recent news, we anticipate a lower demand as this comes into effect. With implementation of the foreign buyer tax in addition to the mortgage stress test, speculation is that prices will continue to drop. If you have thought of moving, it seems as though the month of October and early November will result in the highest profit margins for a seller given the forecast. There will be an in-surge of people that are interested in buying prior to the full mortgage test implementation, and possibly a short-term increase in demand.
If you’re a buyer, and you put more than 20% down AND use a big bank (i.e. TD, CIBC, RBC etc.) to mortgage your purchase property then you will not be affected by the mortgage changes. The only 2 cases where this will immediately affect your scenario are:
1. You put less than 20% down payment and therefore required CMHC mortgage insurance. (any lender, big bank included) [effective Oct 17]
2. You put more than 20% down but use a mono line (aka private) lender to finance your mortgage. (i.e. non-big bank) [effective Nov 30]
If you are in one of those 2 categories, this change will limit the amount of money you are qualified for, thus lowering your purchasing power. Other ways it will affect all buyers, regardless of the down payment structure, is it could also increase your monthly payment if you are relying on a 30 year amortization, as many anticipate a maximum amortization change to a lesser 25 years. Mortgage availability will drop in high-valued regions like Vancouver and Toronto and rates will rise nationally. As competitors raise rates, banks will likely take that opportunity to INCREASE their own rates.
–> Should you buy now?
– With the recent news, the government is being extremely conservative regarding the amounts one can purchase. Put simply, even though your interest rate is (example) 2.5%, the banks stress test you at 4.64% (big bank benchmark 5 yr fixed rate) to determine whether you will still be able to afford your mortgage payments at the higher rate. If you are thinking about investing or making a move, the amount that you can qualify for decreases significantly when you are assessed on a 4.64% interest rate vs. a 2.5% interest rate. Thus making it more difficult to move to your next dream home, milestone, or invest for your future if you’re putting less than 20% down or relying on a monoline lender for financing. If the interest rates increase, amortization periods decrease, and/or the amount you qualify for decreases, just one of these – let alone a combination – may still put you in a worse position despite any subsequent decrease in the average price of a home.
Here are some quick definitions that will make understanding easier:
High loan to value: When you put less than 20% down payment of the purchase price
Low loan to value ratio: When you put more than 20% down payment of the purchase price.
Please see the image below for more details:
If you’d like to read in to more detail, I found the easiest article to explain what the changes are, and who it will affect at: