Mortgage changes will have huge impact - Please Share
Posted on Oct 3, 2016 in Mortgage Market Updates and News
If you've been shopping for a home the past few months, now may be the time to move on your purchase.
In an effort to keep the housing and mortgage market as stable as possible, the Federal Government announced new regulations for qualifying for mortgages this morning. A few new rules were announced, but at the forefront for most of my clients and first time home buyers in general, a major change in how we qualify 5 year fixed rates will be the most important.
Without going into too much details, here's the gist...
Currently, 5 year fixed rate mortgages require less income to qualify for than variable rates or shorter term mortgages. Because of that, and the fact that lenders typically offer the best 'deal' for 5 year fixed rates, they are by far the most common choice. This mornings announcement changed the rules so that all mortgages will be qualified on the same basis, increasing the rate that we qualify clients at for 5 year fixed rates (not increasing actual rates though). Here's how it breaks down:
Very simply, a person currently approved for a $300,000 purchase, will qualify for about 22% less, or $234,000 after October 17th, 2016. A person who can currently afford a $600,000 home, after October 17th, will only be able to qualify for a home up to $470,000. So if you've been shopping around, not really finding anything in your price range you're satisfied with, be prepared to be much less satisfied as the amount you qualify for takes a substantial hit.
To clarify - Actual rates have not increased. 5 year fixed rates remain around 2.39% with most lenders. 4.64% however, is the rate we'll be using to calculate payments to determine how much you qualify for going forward.
Looking at the positive side of things, this is a great move for the stability of our mortgage market. It's no secret rates are incredibly low, have been for a long time, but will not be forever. It's been a practice of mine as a mortgage broker for many years, to 'stress test' people's income/mortgage payment ratio with more 'realistic' interest rates. I always look to see, if rates went up to 5%, would you still be able to afford your mortgage. In a lot of cases, the answer has been no. That may sound scary, but 5 year fixed rates have been easier to qualify for for a reason; you have payment stability for 5 years. In 5 years, your mortgage balance will be lower, your income will hopefully be higher, and things will balance out even if rates are higher. But in a world where stable jobs with increasing incomes are harder and harder to come by, maybe this is a good move. It certainly makes for a safer market by reducing what often debt-loaded buyers can afford. But if this is in any way an effort to cool the overheated Vancouver Housing Market, it's a huge fail. If the government wants to do something about the Vancouver market, they need to do away with the 'New to Canada - 35% down payment = no income verification' program, but that's a blog post for another day :-)
What does the future look like? - I predict an incredibly busy next two weeks as buyers rush to make deals before their affordability drastically changes. Lenders will be overwhelmed, approvals will take longer, this will be frustrating as people try to get their deals signed off on before the changes take effect. Next we'll feel the slow down. Prices may drop as a lot of people will choose not to buy. We may begin to shift back into a buyers market. In the long run, first time home buyers will be hit hardest, and smaller, more affordable markets like Port Alberni, will likely benefit as buyers begin to put more importance on value for money and affordability.
If you're wanting an idea of how much these changes effect you, or you're wanting to buy in the next two weeks before the changes take effect, please call or email me to discuss your mortgage needs.
TMG The Mortgage Group Canada Inc.