I’ll get right to the point because the clock is ticking.
In 10 days from now, new rules kick in for mortgages.
Starting October 17, 2016, all buyers with less than a 20 per cent down payment must qualify based on the five-year benchmark posted rate, which is currently approximately 4.6%.
So this means that a buyer works with a mortgage broker or talks to their bank, finds or negotiates a low rate such as 2.39% and then after October 17, 2016, we all have to pretend the rate is actually 4.6%.
The buyer needs to have the debt ratios and income to support a rate of 4.6%, which they aren’t going to have to pay. If they do qualify at that mortgage rate, they get approved and pay the actual rate the lender is offering, such as 2.39%.
If they can’t qualify with a rate of 4.6%, then they get approved for less money. It is estimated that buyers will lose approximately 20% of the purchasing power, which means they get approved for 20% less than before.
On November 30, 2016, some more changes kick in, where there are new restrictions on when the federal government will provide insurance for low-ratio mortgages. Low-ratio is typically defined as less than 80% of the price of the property and the insurance covers the lender (the company that gives you the mortgage) of 100 percent of the loan in the event of a default.
This is typically done through the Canada Mortgage and Housing Corp. Insurance is sold by the CMHC and a couple of other private insurers to lenders. If you bought a property recently and put down less than 20% as a downpayment, you are familiar with the high-ratio insurance costs, often just called CMHC costs, which the lender passes straight to the buyer. If you put down more than 20% you wouldn’t have been charged any CMHC costs, but the lender still paid a fee for insurance for the loan. They don’t charge it to you separately like with a high-ratio mortgage and instead just build it into the rates they charge for the mortgage.
The specific changes coming November 30, 2016 are:
- Mortgage amortization periods have to be 25 years or less. 30 or 35 year amortizations will no longer be insured.
- If the purchase price is more than $1 million, your lender won’t qualify for government insurance. The government doesn’t want to insure your home if it is worth more than $1 million, which will prevent big exposure for the government on the high price homes if the market corrects.
- Buyers have to have a credit score of at least 600. If you have a credit score below this and find a lender willing to give you a mortgage, the government won’t insure them for the purchase.
- The property has to be owner-occupied or the lender won’t qualify for insurance from the government. This means that every lender who is happy to give mortgages to investors who want to increase the rental pool will no longer be able to have those mortgages insured.
The impact of these changes to the type of mortgage amortization, property price, buyer credit score and property occupant that qualifies for insurance is simple. Some lenders will stop providing those mortgages and those that continue will pass the increased cost on to the borrower.
So, what do these changes mean to you? Let’s get to it.
You own a house outright and don’t have or want a mortgage.
First off, congratulations! You’ve been financially responsible, worked hard and accomplished something the majority of homeowners never do.
Second off, read my article on why you shouldn’t leave that equity in your house untouched. You can make it work for you on whatever terms and risk level you are comfortable. I firmly believe that in most situations, not having a mortgage or secured line of credit on your home is effectively costing you money in the form of lost opportunity.
Thirdly, if you still decide not to get a mortgage or line of credit, then the mortgage changes mean nothing to you. You will likely get extremely tired of all the media coverage on this topic and I’m surprised you even read this far. You are clearly a fan of reading about mortgages, so please continue reading!
When your mortgage comes up for renewal, these new changes apply to you if you want to take out any equity in your property or move to a different lender.
Unless you stick with your current lender and just renew the mortgage, you will have to requalify under these higher criteria.
When it is harder for you to move to a different lender, it means your existing lender doesn’t have to be as competitive on rates. If you can’t qualify under the new rules, then your lender has all the power and can dictate whatever mortgage renewal rate it wants, as you can’t go elsewhere.
If your mortgage term is ending soon, you should talk to a mortgage broker ASAP. I work with a great mortgage brokerage and would be happy to introduce you to the head of the brokerage for you to make sure you make the right choice. Call or email me and I’ll make it happen.
You might think that because you aren’t in the market to buy a house yet, these mortgage rules don’t directly impact you.
In fact, I believe that the rental market is going to get considerably tighter as a result of these rules. Here’s why.
- Buyers who were barely able to afford buying are going to be knocked out of the market by these changes. When they can’t buy, they rent. So when you are looking for your next rental or extending your lease on your current place, your landlord will have more people interested and rental rates will rise accordingly.
- In November, 2016, the government will no longer insure mortgages given to investors. This means that the cost to investors for their mortgage will rise as fewer lenders offer investment mortgages and those that do pass on the costs to the borrower. Some potential investors will decide against it if the numbers don’t make sense anymore, meaning the rental pool doesn’t grow, which means you are competing against other renters with less properties available than there otherwise would be in the market. So you have fewer options and as above, more competition.
The moral of the story here is that if you are renting and like your current place, consider talking to your landlord about signing a lease for an extension. A lease at an agreed upon rate and term is a way to protect yourself from a price bump or the landlord choosing to rent to someone else for more money. It can still happen at the end of your lease, but you’re protected for a bit at least.
You are going to impacted by the mortgage changes in both good and bad ways.
First off, the good news is that I predict this will tighten up the rental market. More people looking to rent mean more prospective tenants for your property, which can mean higher quality tenants and higher rents.
The bad news is that your mortgage will be impacted at renewal by the changes. If you can sign up for a mortgage at a great rate before November 30th when income properties are no longer qualifying for government insurance, you should seriously consider doing so. Otherwise, be prepared for less competition amongst lenders for your business at the end of your mortgage term, which will likely result in a higher rate.
You can be impacted by the market changes in two separate ways depending on your situation.
If you are looking to stretch a bit and get a place that is close to your limit, things just got a lot harder. After October 17th you will be approved for a lower mortgage amount or possibly not approved at all. The new budget you have may not mean it makes any sense to buy as you don’t get the benefit you were after when you thought about moving. If you end up continuing to rent, then keep in mind the issues facing tenants described above.
You should step up your search over the next week. It is important to make sure the home is the right home for you and that it remains a good investment, but now is the time to make time for the search to see if a property can be found and purchased before the rules come into effect.
The second situation is if you have a significant down payment available and are wanting to buy at less than your maximum, you should see a bit of a drop in competition. It will depend on the type of home you are looking to buy but I am predicting that we will see some buyers drop down in price points, which will put pressure on the lower priced homes as they become the only option for buyers. I think competition for homes under $500K will becoming fiercer as these rules kick in, whereas if you are in the $750K to a $1M range, you might see fewer people bidding against you due to the rules.
If this is your situation, you should confirm with your bank or mortgage broker that your planned budget and search is still accurate. You should work with your Realtor (hopefully me!) to search for the right property but waiting until after October 17th for offers is likely a smart move.
The cost of a mortgage for investment properties will increase after November 30th, as the lenders no longer qualify to insurance your mortgage with the government. Some lenders will stop servicing this type of client and others will pass on the cost.
If you want to buy an investment property, the numbers will look better before November 30th. Give me a call or email if you want to make it happen before then.
Unless you are already on the market, you won’t be able to list and sell before the October 17th date. Any benefit from buyers who are facing that deadline is, in my opinion, outweighed by the lack of time to properly position your house at its most attractive and gain enough market exposure for the best sale price.
When you do list your property, the impact of these changes on your sale will be dependent on the price and the type of property.
I am predicting that properties priced under $500K will become more popular after the new rules kick in as fewer buyers will be able to qualify for higher mortgages. First time buyers and those looking to enter the housing market as an alterative to continuing renting will push the low end up as they compete to buy a property within their new mortgage limit.
Properties in the $500K to $800K range will attract more attention and competition over the next 10 days as buyers struggle to get their full approval in before October 17th. In my experience, there are significant buyers in this price range that won’t qualify for the same amount under the new rules. After October 17th, I expect to see this segment calm down a bit as buyers shift down in their budget with the new mortgage amount they qualify for now.
The top of the sub-$1M market will see limited change leading up to October 17th, with homes in this price point continuing to be popular. My gut feel is that the buyers looking at this price point will be less impacted overall than the other segments. It’s a very competitive space already and I don’t see these changes impacting that, either before October 17th or after.
If you are over $1M, then you’ve already been impacted by mortgage rules changes from earlier, with buyers requiring 20% down. This made a significant difference in this segment. The October 17th change won’t impact this much, but as of November 30th, homes sold over $1M won’t qualify for mortgage insurance through the government, even with that 20% down. There will be limited impact as buyers have that cost passed on to them by mortgage lenders, but with large downpayments and typically very good debt servicing ratios, buyers in the over $1M segment are generally in good financial shape. Your property listed at over $1M will not see much direct impact, which is somewhat ironic as the federal government is implementing these changes in part because they don’t want exposure insuring these homes.
Finally, the type of property you are selling is a factor if your property is best suited to being an investment property. A multi-unit property which appeals to investors will be harder to sell after November 30th when lenders can no longer get mortgages to investors insured by the government. Some lenders will stop funding that type of property and others will pass on the costs for the new costs to the purchaser.
As investment properties are an economic decision rather than an emotional decision, any change in the costs with buying a property can impact the decision an investor makes. Marginal income properties with negative cashflow will become more unattractive and those properties that are cash flow neutral might need to reduce the asking price to keep that position with the new costs as of November 30th.
Whew..that was a lot of different ways in which the new mortgage rules will affect you.
I hope you find it useful and that you’ve got a good idea now of what you can or should do moving forward. If I can help you with an introduction to the head of my mortgage brokerage or work with you on the buying or selling side, please get in touch. I’d love to be responsible for what comes next.
SLEEPING TO THE EAST
Give those parts of the house where people sleep, an eastern orientation so that they wake up with the sun and light.
Home builders often place bedrooms, particularly master bedrooms with ensuite washrooms and closets, in the place that makes the most sense architecturally. It amazes me how often I see homes where the people living in the home choose their primary bedroom to be the one facing east, even when it may not be of a size or layout that is ideal. When considering a home, look to where the bedrooms face to see if you’ll be happy with the orientation.