For some, owning a house is the number one indicator they are a successful adult. For others, owning a house is the last hurdle before having a family. However, the new changes to the mortgage rules could make buying a home more difficult than ever.
RISING DEBT MEANS TIGHTER MORTGAGE RULES
Policymakers have created these new mortgage rules as experts suggest Canada is in for a credit crisis if Canadians do not get their debt under control. According to some, the average rate of debt is at an all-time high: $1.68 for every dollar of disposable income. This is due to a slump in household wealth growth while levels of debt continue to rise. In an effort to combat these staggering statistics, Canada’s banking regulator has tightened the rules on mortgages. Changes that could greatly impact your ability to own a home.
YOUR DOWN PAYMENT IS EVERYTHING
Saving up for your home is as exciting as it is exhausting. Knowing how much to save can greatly impact the quality of home you buy. However, what your down payment means to your borrowing power is changing.
Down Payment Amount Can Help You Avoid Expensive Mortgage Insurance
When making a downpayment on a home, reaching the critical 20% of the overall price of the home is crucial. Without meeting this benchmark, home buyers are required to purchase mortgage insurance. This insurance can range in price from 0.6 to 4.5% of the mortgage, depending on property price and the down payment made, and those rates are rising.
With the changes made to Canadian mortgages, even those who are uninsured (those who made a 20% down payment on their home) must pass a stress test. What this means for the borrower is that they must be able to show that they can continue to make their mortgage payments even with a 2% increase.
Qualifying For All Mortgages
Uninsured borrowers have higher expectations – with their test equivalent to Bank of Canada’s five-year posted rate. Those who cannot make a 20% down payment will now need to qualify for all mortgage types. This is expected to cause a drop in the amount of five-year fixed mortgages as first-time home buyers find refuge in shorter fixed-rate or variable mortgages.
BUYING POWER AND HOME PRICES
These new, stringent rules imposed upon Canadians will significantly change the buying power of individuals, especially first-time buyers. The expectation to qualify for a variety of mortgages and to pass a financial stress test of increased interest is forecasted to reduce a potential buyer’s ability by 21%. This is expected to lead to a 10 to 20 percent decline in home sales, especially the big ticket homes.
With a smaller budget to work with, individuals will be less likely to buy their home. Instead, they may continue to rent. For those pricier homes, properties worth over $1 million, their sales will see a dramatic drop as fewer buyers qualify for a mortgage that large. For this reason, the Vancouver and Toronto real estate markets will be hit the hardest by these changes.
Forecasting These Rules on the Future
These tight rules have been called a war on homeownership. The UK is already experiencing a phenomenon known as “multi-generational mortgages”, which are exactly as they sound: mortgages that span more than one generation. Sweden’s average mortgage is 140 years.
However, the future may not be all that bleak for Canadians just yet. What we can expect is that fewer people will buy homes or more will opt for a lower priced home. Individuals who would like to be homeowners will need to scale back other debt and come up with a bigger down payment.
Trust a mortgage broker to help you make choices that are right for your budget and your needs. Talk to an expert at Mountain Park Real Estate.