Booya and the Government changes the mortgage rules again!
This past week the Trudeau Government took us all by surprise by announcing new mortgage qualification rules. The mortgage industry and the media have gone wild with speculation and concern about the future of our industry, but what does this mean for you and how do you navigate these changes going forward?
Currently in place, the Government has required homeowners with less than 20% down to qualify at the BOC rate of 4.64% for any term less than a 5-year fixed rate. Effective October 17, 2016, this requirement will apply to all insured mortgages, including fixed-rate mortgages with terms of five years or more.
Why are they doing this? Well it is a stress-test, which means that with debt levels increasing, they want to ensure that Canadians can afford their mortgages if and when the interest rate begins to rise. If you are a buyer with more than 20% this does not affect you, however if you have less than 20% and require mortgage insurance this will definitely affect you!
Did anyone see this coming – NO! Did they consult the lenders, the industry as a whole, even the banks? NO! The discussion has been focused on the foreign buyer, which they are solely blaming on the rising house prices, but what about other factors that affect the rising house prices, such as supply and demand? Simple Economics!
Just over 1 year ago they rolled out the new rule for purchases between $500,000-$1,000,000, to curb the market by asking buyers to put more than 5% on an owner-occupied purchase over $500,000. Things slowed down very briefly and then jumped up again – with very little effect other than higher downpayments required.
Now it takes aim again and a variety of segments will be affected, such as the First Time Homebuyer and Real Estate Investors to name a few.
How? By raising the qualification rate to all insured mortgages to 4.64%. Prior to October 17, 2016 a 5-year fixed rate is still qualified at the prevailing 5-year rate, which currently sits at 2.49%. However following October 17th, it will also be qualified at the 4.64% rate.
The prior rules helped buyers, who could not qualify at the BOC rate of 4.64% to qualify at the 5-year fixed rate. This was good and bad. Good because it gave the borrower options but bad because the 5-year fixed rate, which is the most popular mortgage offering, makes the lender a lot of money, if and when that borrower breaks their mortgage earlier than the affected term.
This week the effects came fast and furious, with insured lenders such as First National, Merix and MCAP to name a few stating that they will no longer accept applications for rentals, unless they are owner-occupied rentals.
As a mortgage broker, who deals with these lenders for their products it will surely hurt our business but also our clients who are real estate investors as they will be forced to go to lenders tat offer rental property mortgages but with higher rates and fees. For some investors this change will ultimately impact their bottom line and cash flow! First Time Home Buyers will be forced to either qualify for insured mortgages or pay higher rates or put more money down to use non-insured lenders. This segment will be particularly hit hard.
Canadians are resilient but at what cost does it come to own a home? When there is an oil crisis, people are losing jobs and ultimately their homes in some parts of the country and now the housing market is surely set to take a major hit – what will these new rules result in? Your guess is as good as mine!