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New Canadian Mortgage Rules
Okay, so you may or may not have heard the grumbly fear mongering about the new mortgage rules coming into effect over the next couple of months. There are a few changes coming, but the most important one (in my opinion) comes into effect on October 17, 2016. SOON! Let me try to clear things up a bit, as it's not all doom and gloom!
Let's say you wanted to start looking for a home, so you did the smart thing and went to a mortgage broker to get pre-qualified and to find out how much house you can afford. (Good for you! Gold Star!) You have been qualified to purchase a home with a maximum price of $350,000 and your mortgage specialist is going to get you an amazing, low interest rate of 2.34% on a 5 year fixed mortgage. Woohoo! As of October 17th, you will need to qualify at the benchmark qualifying rate (which as of today is 4.64%, but it will change regularly). You would now only qualify to buy a home with a max price of $280,000. This equates to a 20% drop in buying power. (All things being equal in terms of property taxes, income, debts, etc).
The important thing to note is that this is a "mortgage rate stress test". YOU WILL NOT BE PAYING THE BENCHMARK RATE. Your payments will still be based on that fabulous rate that your broker was able to get for you, in this example 2.34%. You just have to qualify AS IF you would be paying the 4.64%. This way, in 5 years when you have to renegotiate the terms of your mortgage, if rates have risen (and they will rise), you should still be able to afford your home. Savvy?
The powers that be are trying to ensure the affordability of Canadian life without just raising interest rates drastically and immediately. If you qualified at the benchmark rate, but get to pay lower rates for 5 years, that's still a good thing! The thing is that lots of Canadians are overextending themselves, and mortgages are (important, obviously, but also) easier to control than credit card companies, car loans etc.
So! If you still REALLY want that $350k house, you will either need to save longer, or make sure that the rest of your Total Debt Service Ratio doesn't read as scary as a Stephen King novel. Get control of your debt: credit cards, lines of credit, car loans etc. If you're wanting to buy a house, and qualify for $350k at the lower interest rates ONLY BECAUSE you're at the absolute max of what you need each month to pay your debts, then there's no wiggle room for the benchmark qualifying rate. If you can still afford to make the mortgage payments on a $350k house, even at the benchmark rate, then it's likely because there was enough room in your budget because you don't have much debt. You DIDN'T buy that shiny new $50,000 car, but hey, look, you qualify for a better home!
If you do have to be at the max of your debt repayment allowance, and you cannot wait to buy a home, then you have to be willing to look at $280,000 homes. As always when buying a home, there's nothing worse than wanting something you can't afford. It can break your heart, your wallet, and make you blind to potentially decent homes in a lower price range. For the first-time buyers out there looking at lower price points, this may affect you most of all. The best advice I can give is to keep your expectations realistic, keep your credit spending under control, and work with a good mortgage broker who can look out for you and explain things better than I can! The best people to advise you about mortgages and finances are specialists.
It's still a good and exciting thing to buy a home; there are just more hoops to jump through to ensure that it'll remain a good thing for you in the long run!
Ethos Realty Inc.
755 Osborne Street
Winnipeg, MB R3L 2C4