November 18, 2016
Adjust your expectations
by KEVIN LUTZ
In order to temper housing activity across all markets in Canada, big news came on Oct. 3 when federal Finance Minister Bill Morneau announced tighter mortgage insurance rules. One of those changes involves mortgage-qualifying rules for certain homebuyers.
As of Oct. 17, 2016, all new mortgage borrowers with a down payment of less than 20 per cent and seeking mortgage insurance (high-ratio mortgages) are required to qualify using the five-year posted rate (currently 4.64 per cent) or the contract rate, whichever is higher.
How does this affect you? Prior to Oct. 17, the qualifying requirement of using the five-year posted rate as a stress test was required only for high-ratio mortgages when homeowners chose a variable rate or a fixed-rate term of less than five years. Under the new rules, if you choose a five-year term, you can no longer get qualified for a mortgage amount based on the discounted rate, which currently averages at least two-per cent below the five-year posted rate of 4.64 per cent. Therefore, the amount of mortgage you qualify for could be reduced by as much as 20 per cent depending on your income and purchase price. To be clear, you still receive the discounted rate for your mortgage.
Of the new measures announced by the finance minister, the changes to the mortgage insurance qualifying requirements have the potential to exert the most significant effect on Canada’s housing market in the near term and will affect the largest segment of Canada’s mortgage market. Fixed-rate mortgages represented more than 75 per cent of new mortgages in Canada in 2015. Additionally, according to historical Mortgage Professionals Canada surveys, about two-thirds of mortgages in Canada were five-year fixed-rate mortgages. Because first-time homebuyers tend to be the primary users of mortgage insurance, they will be most affected by the change. It is important to note that these changes will have implications not just in Vancouver, but all across Canada.
A positive note, however, is that interest rates remain at record lows. While the changes may cause a general slowing in the market, and potentially lower your purchase price expectations, this can provide opportunities for savvy buyers. So be prepared! Now, more than ever, prospective homebuyers should speak to a mortgage specialist to get pre-approved in order to shop with confidence when looking at homes that are within their budget, and allow them to act quickly and confidently when they find the right home.
Kevin Lutz is RBC Regional Sales Manager,