More changes to mortgage lending rules have just been announced by the Liberal government. You may be wondering when these new rules take effect and what they mean for you and your future ability to purchase a new home or your ability to sell your current home.
Why has CMHC changed the rules?
By tightening the parameters on lending, the federal government wants to protect Canadian lenders from potential insolvency and to prevent home buyers from taking on too much debt. It is believed that as things stand now, some home buyers would not be able to absorb an increase in interest on their mortgage loans should the rates rise. Interest rates remain at historically low levels.
What are the new rules?
The new rules come into effect October 17, 2016 and are applicable to anyone applying for an insured mortgage with a down payment of less than 20%. Anyone taking out a mortgage must qualify at an interest rate at 4.64%, regardless of the term of the mortgage. The actual interest rate on a loan once approved will likely be less than that, but a benchmark has been set to ensure that Canadians can better afford to purchase a home. The goal is to increase the affordability, not necessarily the ability to get a mortgage.
This means, lenders can’t use the current 5-year fixed rate of 2.39% in calculating the monthly payments for a mortgage. They must use the Bank of Canada benchmark rate of 4.64%. If you qualify at this higher interest rate, it doesn’t mean you’ll be paying that interest rate. This may make it more difficult for some to qualify for a mortgage. It will also mean that you may have to settle for a less expensive home. However, the up side is that you’ll have a cushion in case interest rates rise in future, albeit a cushion imposed by the government.
Here’s an example
Under the old rules, someone applying for a $400,000 mortgage with a 10% down payment could have been pre-approved at the 5-year fixed interest rate of 2.39%. No problem. Now, under these new rules they must qualify as if the interest rate was 4.64% which means they can no longer afford a $400,000 mortgage but $320,000 mortgage. They will still pay 2.39% once the paperwork is finalized but it certainly puts them in a different price bracket when looking for a new home, especially with a down payment of just 10%.
Less house but lower monthly payments
Here’s another way of looking at this change:
Today (prior to October 17, 2016)
- You may qualify for a $300,000 mortgage.
- Your rate to qualify for that amount is the actual rate of $2.39%.
- Your actual payment to qualify is $1,300 a month.
After October 17, 2016:
- You will only qualify for a $237,000 mortgage.
- Your qualifying rate will be determined at 4.64% and your qualifying payment will be $1,330 a month.
- Your actual mortgage payment upon approval will be $1,050 a month.
What this means for sellers
These new guidelines are for buyers with down payments of less than 20%. In a time here in Alberta where the pool of buyers is already shrinking, this could mean that first-time buyers might postpone their purchase in an effort to save for a larger down payment. It would also mean that homes which would appeal to first time buyers, typically under $400,000, may be on the market longer. It could be good news for sellers with condos, town homes and attached homes. As buyers with smaller down payments are forced into a different price bracket, they may change their expectations of purchasing a single-family home in favour of other affordable options.
What action should you take?
- If you are a seller who has accepted an offer, you may want to ensure that your buyer has mortgage approval and the financing conditions are waived before October 17, 2016.
- If you are a buyer with an eye on a property you will want your offer to be accepted before October 17, 2016.
- If you’re still looking for a home and you know that the October 17 deadline is too tight, talk to your real estate professional or mortgage broker to see if your qualifying price range has changed.
Call Justin Havre & Associates at 403-217-0003 to find out what you are qualified to buy and how we can help you buy or sell your home. We are always here to help.