On October 3rd, the Liberal government announced new changes to its existing mortgage rules. These new rules aim to cool down overheated housing markets and curb home buyers from taking on more debt than they can afford.
Following October 17, 2016, people purchasing a home in Canada with an insured mortgage will be required to meet new “stress test” financial requirements. These new requirements now calculate a household’s debt-to-income ratios to the most recent Bank of Canada interest rate.
As a result of the new changes, the affordability of fixed-rate mortgages will decrease. Therefore, freezing any immediate plans of buyers seeking CMHC-backed loans to purchase the homes they really want. In order to qualify for a government-insured loan, buyers will have to meet the government’s posted fixed rate of 4.64% — not those from a bank or credit union.
This significantly higher rate can shrink housing budgets by tens of thousands of dollars for first-time home buyers. These new changes will have a hard and profound impact on Toronto buyers. Housing price values in the city continue to rise month after month.
If your down payment is less than 20%: Paying less than 20% comes with a greater loss of affordability. This effect comes from a major decrease in the down payment value.
- A couple with a household income of $100,000 initially puts down a 10 % down payment of $50,000.
- They are currently seeking a $615,000 mortgage at 2.29% on a 5-year fixed-rate mortgage with 25 years of amortization.
- With the new rules in place, the couple can now only afford a home worth $509,000 on the same terms. At the new government rate of 4.64%, with a down payment value loss of about $12,000, making their contribution worth $38,000.
- If the couple wanted to afford the $615,000 home, they would have to increase their annual income by nearly $100k to balance the overall difference. A hard prospect for most families.
In addition to reduced buying power within 13 days, you will also need to make sure that the offer on property you wish to buy, whether your mortgage has been approved or pre-approved, is firm before October 17th. This will give you up to 120 days of working time to close the deal. Thus, ensuring that your offer is protected from the new policy.
This couple could consider purchasing a home that is valued for less to save some money. By doing this, they can stay within their initial down payment range while still owning property.
If your down payment is equal to or greater than 20%: After November 30th, if your mortgage is insured yet you’ve managed to offer more than 20% to the seller, you will also be impacted. Paying at least 30% will no longer be an option, but a requirement to remain competitive.
- A couple earning an annual household income of $300,000 has saved a down payment of 25% for a home valued at $880,000.
- The couple saved $75,000 of their own money just in case. They decided to finance the down payment by combining $200,000 of equity from their first home with a $25,000 line of credit.
- Upon attending an open house, they find out that their offer of $225,000 is not enough compared to higher bids.
- In order to secure their dream home, the couple pays an additional 10% (or $90,000). They were forced to take out more equity and using their savings.
- The seller agrees to their down payment of $315,000(or about 35%) and the couple closes the deal.
Like this couple, you may want to make other arrangements to guarantee that you can get your desired property. People who can afford to put down 30% or more will not hesitate. Trying to be one step ahead will always help.
Having a blank deposit cheque with an open mind to closing amounts, arranging for pre-inspections, having access to equity for supplementing down payments, and making sure that your financing terms are ready will give you a strong advantage.
If you’re selling: Make sure that your home is ready for viewings as soon as possible before the 17th. The faster you can sell your home before, the better you’ll fare when closing time comes.
- A person is looking to downsize and wants their property to be sold before selling prospects becomes uncertain. They are open to private and market-based offers
- They consult with an appraiser, interior design stager and a realtor to make sure that their home is clean, modern and ready for open-house viewings
- While arrangements are being made to finalize preparations, the seller receives a private bid to buy the property as-is.
- The seller will only agree to the offer if the buyer pays a value that is 40% above the market price to compensate for renovations, legal fees and closing costs; the buyer refuses.
- The seller resumes with the house-selling process and later closes to a couple who paid the additional value.
In this scenario, the seller had the advantage to know their home would fare better to buyers willing to meet the seller’s demands.
What makes this a Toronto issue?
Being that the Greater Toronto Area mostly holds moderate-to-high valued property, renters looking to become buyers along with sellers can benefit from the new rules by planning smartly. While the rules will generally affect homes worth less than $1,000,000, most non-luxury Toronto properties are valued far less than this threshold.
Owner occupation will now be a requirement as well for lenders to insure CMHC-backed property. Previously-vacant condo units may become rental suites in backlogged downtown Toronto.
More positive results of the new rules:
- Buyers ready and able to put down above 20% can start house shopping more confidently.
- Sellers can facilitate bidding with less caution.
- Renters can take advantage of knowing the new rules and save until comfortable with deposit amount.
While the new rules come across as intimidating, home ownership is not automatically out-of-reach for Torontonians. In fact, it’s being redefined — a benefit to Canada’s growing economy.
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