October 5, 2016 | Toronto Housing Market
Oops, They did it again! It looks like the Federal Government has made changes to the rules of mortgage qualification in an attempt to hold back the appreciation of properties in Toronto and Vancouver. For the sixth time in eight years the Feds are stepping in to try to regulate the housing market by making it tougher to qualify for a mortgage. I would safely say that the previous five measures were like building a dam with a popsicle stick to try to stop a river. It was not very successful at slowing down the market. This time, however, The Feds new ideas do have some heft. So, let’s take a look at some of the highlights, and see who may benefit and who won’t.
Here are the 4 big ideas put forward by the Feds:
- Stress Tests For All Insured Mortgages As of October 17th of this year, a stress test to be used for approving high ratio mortgages will be applied to all new insured mortgages regardless if it’s 20% down or not. The stress test will assure the lender/ insurer that the home owner could still afford their mortgage, even if interest rates were to rise. So, for example, if you qualified for a 2.49% 5 year fixed mortgage, you would now need to qualify as if your rate was 4.64%. To be clear, you are not paying a higher interest rate, but you have to qualify for a mortgage as if you are. If you have a pre-approved mortgage at 2.49% requiring insurance, you may not qualify to buy as much after October 17th.
- New Restrictions On Low-Ratio Mortgages Other aspects of the stress test require that the home buyer will be spending no more than 39% of income on home carrying costs like mortgage payments, heat and taxes. For mortgages with less than 20% down, the new amortization period would be 25 years or less. Your credit score must be 600 and the property must be owner occupied.
- New Reporting Rules for your Primary Residence This one is aimed at foreign buyers who buy and sell homes by falsely claiming a primary residence on a property that is not their primary residence. If you are not a foreign buyer who is doing this, you may think: This really won’t effect me. But you would be wrong. It means more paper work for all of us because we are now obligated to report the sale of our primary residence to the CRA.
- Coming Proposal to Banks and Lenders The Feds would like the banks to take on some of the risk if an insured mortgage goes into default. This one seems a little half-baked at the moment, but it could mean banks would have to take on some risk, which may result in higher mortgage rates for everyone so they could protect themselves.
Now that we have the new rules up, let’s now take a look at how this breaks down for you whether you area a buyer or a seller:
These new rules could benefit you depending on what kind of buyer you are. If you do not require an insured mortgage, you may have less competition, and buying a property may be easier than before these changes since some of your competition won’t pass the stress test. If, on the other hand you do require an insured mortgage, then you may not quality for as much on your pre-approval as you thought you could afford because you now have to qualify at a higher interest rate. In short, to pass the stress test, you may not be able to afford as much. It may mean you need to wait and save up more money or buy something at a lower price point.
In the short term, there may be a rush of insurance-requiring buyers who will want to buy something before these rules go into effect. If that’s so, we may actually see a stronger seller’s market than unusual for the next month or two. If you are selling next year, you may have fewer buyers looking at your property because some of them may not do so well on the stress test.
The really big question to all of this is: What kind of impact will this have?
And to that I have to be honest: I don’t know. Still, I can see that many other times the government intervened to restrict mortgages, the results have either made no difference at all ( see popsicle stick and river reference in first paragraph) or have held back sales for a season before they continued on their previous course. These new set of changes do seem to appear more impactful than the previous ones, but time will tell us whether they are able to hold back the large number of buyers who are buying from an anemic number of listings coming to market in Toronto. I guess if the Feds can’t increase the inventory on the sell side, they will take out some of the buyers on the buy side.