Are you thinking of buying a King West condo for sale and wondering how Oct 4th’s mortgage rule changes will affect your ability to get a mortgage? Read on…
Oct 4th’s announcement was a surprise to everyone who has an interest in mortgages including lenders, insurers, mortgage brokers, realtors and, above all, consumers. Immediately after the announcement we began researching the details of the changes to mortgage rules and developing an appropriate response. So far, there has been very little analysis and no clarification on aspects of the changes.
Our feeling is that these measures have been enacted due to the fact there does not seem to be any indication that interest rates will be rising anytime soon. With these unprecedented low rates two housing markets have continued to rise at a very rapid pace relative to historical norms. As history has shown, a steep rise generally leads to an eventual steep fall, which is not good for anyone. With this in mind the Minister of Finance is attempting to apply changes in hopes of smoothing out the peak and ultimately any future valley in our real estate market.
What are the changes to mortgage rules?
The Minister of Finance announced changes to 3 areas:
1. Consistency among Insured Mortgages 2. Tax Fairness 3. Managing Risk
Of these, Consistency Among Insured Mortgages contains the change most relevant to our industry as some consumers will either not qualify at all, or, if they do, it may be for a reduced amount. It applies to borrowers with less than 20% down payment.
For a number of years the government has required lenders to stress test variable rate mortgages and fixed rate mortgages with a term of less than 5 years against a higher benchmark rate. Yesterday the Minister extended this requirement to all insured mortgages, including fixed-rate mortgages with terms of five years and more. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.
The stress test requires lenders to qualify lenders at the higher Bank of Canada benchmark rate, currently 4.64%, instead of the contract rate which today could be, say, 2.5% for a five year fixed rate mortgage. With the stress test borrowers may qualify for a smaller loan which in turn will provide a buffer should rates rise in the future.
How Will The New Measure Be Applied?
The announced measure will apply to new mortgage insurance applications received on October 17, 2016 or later. This measure will not apply to mortgage loans where, before October 3, 2016: a mortgage insurance application was received; the lender made a legally binding commitment to make the loan; or the borrower entered into a legally binding agreement of purchase and sale for the property against which the loan is secured. Mortgage loans for which mortgage insurance applications are received after October 2, 2016 and before October 17, 2016 are also not affected by the rule change, provided that the mortgage is funded by March 1, 2017. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.
How Will This Affect The Market?
We don’t believe this measure will change the nature of our market in the near term as there is extremely low inventory, rates are at historically low levels and the GTA is growing.
Consumers who are on the margins of qualifying for a mortgage will be most affected – many of these will be first time home buyers. It has been estimated that 10% of borrowers may be impacted.
What Should Clients Be Advised?
Clients who are currently approved or pre-approved should always be advised to consult a mortgage broker. It is generally safe to advise clients that if they purchase prior to October 17, 2016, the existing rules will be in effect for them. Agreements of Purchase and Sale that are signed on or after October 17, and mortgage applications that are submitted on or after October 17, will be subject to the new stress test rules.
At this time we do not feel the second and third change will have any effect on the market.