As you may have heard by now, the government introduced some important changes this week that will have a fairly significant impact on the mortgage industry going forward. The changes were not expected and seem to have come out of nowhere, with little consultation from industry representatives.
While there were a few major changes, there is one in particular that has been highlighted and will have the greatest impact on the everyday homebuyer.
What is the change?
As of October 17th, all insured mortgages (typically mortgages with less than 20% down payment) will have to be qualified at the benchmark rate. The benchmark rate is a posted rate set by The Bank of Canada that currently sits at 4.64%. Prior to this change, most mortgages were qualified at the contract rate (the actual rate the borrower receives). The typical contract rate is around 2.50% right now.
What does this mean?
Simply put, a borrower applying for an insured mortgage after October 17th will qualify for less than they did before. For example, a client that used to qualify for a $250,000 mortgage would now only qualify for a $200,000 mortgage (approx.). On average, most borrowers will qualify for roughly 20% less than they used to (insured mortgages only).
Why was this change made?
Since the recession in 2008, the government has been very concerned about our housing market. They want to ensure we don’t have the same housing issues our neighbours to the south have experienced. It seems almost like an annual tradition that they enforce some sort of new measure to further tighten mortgage guidelines.
The main concern is that we have been in a low interest rate environment for about eight years. Eventually, rates will increase and they could return to the 4-6% range that we had pre 2008 (Don’t panic…it will be a while before we get there). The concern is if a homeowner has to jump from 2.5% in their current mortgage to 4.0% five years from now (when they renew), then it’s possible some people may no longer be able to afford their mortgage payments (only likely if they originally borrowed at their absolute maximum capacity). Regardless, the government wants to minimize any potential future issues so they feel that having homebuyers qualify at a higher rate now will help in the future.
Another concern is the hot housing markets in Vancouver and Toronto. Prices and sales in those cities have been increasing at a ridiculous pace. Vancouver seems to be tapering off a bit now but Toronto is showing no signs of slowing down. These new changes will make qualifying for a mortgage more difficult and in turn will hopefully help cool down these markets at a moderate pace.
How does this affect you?
For any existing homeowners with a mortgage (insured or not), nothing changes. This change will only impact future mortgage applications.
Although this is a big change, I find that most borrowers generally qualify for more than they can comfortably afford. In other words, this change will likely have little impact on 80% of the market. However, I expect that a good number of potential first time homebuyers will be most affected by the change. The increased qualifying rate may be just enough to push them out of the market, especially in larger centres where prices are high.
It will be interesting to see how these changes affect the industry going forward. If you have any questions or would like to know more about how this change affects you, please feel free to contact me.