How will new mortgage rules affect you?

Apparently big brother is actually watching the Canadian housing market.

The federal Finance Minister Bill Morneau finally announced new measures this week aimed at cooling the Canadian housing market – measures that should curb the ridiculously high debt levels that many Canadians seem to take on in their quest home ownership.  The Finance Minister said the new rules will come into effect soon, as in later this month, changes that include a more robust mortgage “stress test” that ensures borrowers cannot take on more than they can handle, including if interest rates go up or household income goes down.

We’ve all read about the issues in our housing market, related to foreign buyers.  Here’s a headline – about Vancouver markets slowing down with the new foreign buyers tax going into effect.

Here’s another article – lobbyists against a similar tax for the Toronto area.

Foreign buyers are an issue in major city centers but folks buying homes they can’t afford in the first place is a bigger one – hence the changes over the current rules.

The big change?  Testing your financial stress

The current state

  • “High-ratio mortgages” exist today – these are buyers with a down payment of at least 5% but less than 20% – so these buyers must be backed by mortgage insurance. Recall, mortgage loan insurance helps protect lenders (not you) against a mortgage default.  It enables consumers to purchase homes with a minimum down payment starting at 5%* — with interest rates comparable to those with a 20% down payment.  To obtain mortgage loan insurance, lenders pay an insurance premium. Typically, your lender will pass this cost on to you. (They did to me way back when.)  The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.  *The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. Mortgage loan insurance is available only for properties with a purchase price or as-improved/renovated value below $1,000,000.  Learn more about CMHC Mortgage Loan Insurance here.

The future state

  • There will be an expanded “stress test” – this stress test will be used for approving the aforementioned high-ratio mortgages AND it will apply to those mortgages where the prospective buyer has more than a 20% down payment. It will apply to all insured mortgages actually, including mortgages with terms longer than five years.  This test will help ensure the home buyer or home owner could still afford the mortgage if interest rates were to rise or if their income dropped substantially.  The home buyer would need to qualify for a loan at the negotiated rate in the mortgage contract, but also at the Bank of Canada’s five-year fixed posted mortgage rate. This rate is typically much higher than what buyers can negotiate on their own or with the help of a mortgage broker.  As of September 28, 2016 – this posted rate was 4.64%.  For comparison purposes, you can easily get a 5-year variable rate mortgage for about 2.5% (or less).  Check of my friend’s site RateSpy to see current rates.

There are other changes coming to the housing market including other elements of the “stress test” and you can read about those here thanks to this Globe and Mail article.

How will this big change affect me?

Not much.  We could afford our mortgage payments if interest rates rose to 5%, although I wouldn’t like it very much.  We have a mortgage for now, one we plan to kill off in another 5 years.  After that, I won’t care what interest rates or bond yields are – which will be nice.  I’ve often read that “life begins when you’re debt free”.  There’s probably a great deal of truth to that statement.  I suspect most debt-free people have more freedom to work in a job or position that they enjoy, because they want to not because they have to, instead of striving to meet certain financial obligations/expenses.  It will be interesting to see how my financial tune changes when we become debt-free.

I’m personally on the fence whether this big change will change the mortgage landscape – as in – will it curb the risk of defaults if interest rates rise?  Will it keep Millennials and other would-be home buyers out of the market? Regardless of what happens I don’t see interest rates rocketing-up anytime soon.

How will these changes affect new housing market entrants?  How will these changes affect you?

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10 Responses to "How will new mortgage rules affect you?"

    1. And I think you are mixing up “financially independent” with a real concept. ?

      First blush, the new rules will keep first-time buyers w/o a 20% DP out of the market, even more so in bubble cities such as Toronto and Vancouver. This may or may not effect prices.

      Reply
    2. Well, not in my case – it’s likely both will happen at the same time – no mortgage and savings will be ample. We’ll see. I get your point though none – these are not synonymous.

      Reply
  1. It’s hard to say what the effects will be. It could lead to less portfolio insurance/MBS being used to fund mortgages, which means that rates for GICs and HISA should go up. I dunno. But not seeing many people talking about possible increases in savings account rates coming.

    Reply
    1. “But not seeing many people talking about possible increases in savings account rates coming.” – that’s my thesis as well John. The rules, while good, won’t change the fact that dirt-low interest rates are here to stay I think.

      Reply
  2. These rules will have zero direct effect on me. Haven’t had a mortgage for around fifteen years or so. As far as how it affects the overall economy, I’m happy if things stay relatively stable. Bursting housing bubbles are in no one’s best interest IMO. The other thing I would like to see is a clamp down on speculators and flippers. Maybe change the ownership period to qualify for tax free when selling a house to two or three years?

    Reply
    1. Nice Lloyd. I hope to be debt-free like you sooner than later. The house flipping is bad in general, but it takes buyers to create that model just like eager sellers! 🙂

      Reply
  3. “How will these changes affect you?”

    The changes only affect me to the extent that I’m once again being made aware that the gov’t can change the rules of any game in town at any time.

    Another lesson in risk management.

    Reply

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