Why more people are not talking about this is beyond me. But maybe that is because anything to do with my industry (general real estate home sales) only seems to be important to the public when it is their turn to either buy or sell.
One of the larger reasons I believe people want to be concerned is that Canada’s top banking regulator has made the decision on October 17, that those fortunate enough to have strength in their real estate purchases need a baby-sitter, someone watching over their decisions to ensure they don’t make a misstep when buying a home with a significant down payment.
While that may seem like a non-issue for most, one must question the fact that a highly qualified individual with a significant down payment to purchase a home (20% or more) is well insulated from any market correction we may ever see, and should have a sort of benefit to make a purchase without having to qualify at rates that have been set for the worst possibly qualified candidates out there.
Let me digress a little deeper here.
Currently, under regulation passed in late 2016, a purchaser of Real Estate in Canada that had less than 20% down to put towards their home had to now qualify for a ‘stress-test’ when getting a mortgage. This meant, that even those with the best credit histories, incomes and lending qualifications now had to show that they could qualify for 2% (or 200 basis points) more than what a discounted rate was at the time. At the time, this was about 4.64% rather than the discounted rate of 2.64% (thanks to ratehub.ca for the info).
Now this can sound like a real positive in this instance. Sure, it removed purchasing power from what the banks deem a “high-ratio borrower,” but didn’t equate to actually spending more money for borrowers. It just meant they qualified to brrow less. It also insulated those with lower down payments from market corrections, meaning that they could confidently keep up with their mortgage payments in the case of rising interest rates or downward housing prices. And it was and still is a positive for the health of our overall real estate market.
So it came into effect. People complained, whined, moaned but guess what, we got over it. The public adjusted not only because it made sense, but because they had to.
Well, this new change is a little different. A little more substantial. Even so, that this has been deemed by some as the biggest jolt to the mortgage industry in decades.
So why did they do it? And why should you care?
The Globe and Mail posted a brilliant article titled “Ten ways the new mortgage rues will shake up the lending market,” and I highly suggest you take a peek at it after reading this. You can access the article by clicking on the title above.
For now though, you are on my blog, so you get my impression of how the effects this regulation will have an impact on our local market. The newspapers will surely be riddled with this topic for the next few months, especially if we see a housing slow down.
I have LARGE concerns for the higher end market, namely detached homes in our region. We live in Metro Vancouver, so unfortunately for us (unlike most other parts of Canada), an average townhome tucked away in quiet Cloverdale for approximately $500,000 could be considered to be on the higher end of the market for many Canadians. For our market however, let’s take a detached home in the Fraser Valley at a price of $850,000.
Let’s also say that purchasers, a nice young couple with a little one on the way need more space and are going to sell their current home, a local condominium which they have made a little bit of equity in over the last few years. This nice young couple, who makes approx $117,000 a year combined, plans to put down 20% on the new home, an excellent chunk of change.
Assuming the family's mortgage rate is 3.39% currently, after January 1, 2018 under the incoming rules, the family would be stress-tested at 5.39%. Lenders will soon be required to "stress test" all uninsured mortgage loans – those where the buyer makes a down payment of at least 20 per cent of the home's purchase price – at the greater of the Bank of Canada's five-year posted rate or 200 basis points (two percentage points) higher than the negotiated contract rate.
Under this lovely scenario, this couple originally was able to afford a home of about $850,000. After January 1 however, their purchasing power just went down to approx $757,000.
Folks, thats a difference of $93,000.
And that is based on them taking a 30 year amortization on their mortgage, 5 years longer than an insured mortgage is able to take under regulation. (A big thanks to Jeff Ingram at Dominion Lending for sharing those numbers)
Welcome to NOT owning that detached home you have had your eye on.
How many homeowners do you think dream of ‘buying up’ into a bigger, better, more spacious property are going to be effected by this change?
And what if we amplify those numbers with a bigger down payment? Or better qualified purchasers? Or more combined income? Doesn’t matter. The results stay the same. A borrower’s purchasing power, regardless of the down payment, will be significantly reduced come January 1 of next year.
Don’t you think this will have an effect on the higher end market? (This is where you nod your head in realization)
I have some predictions for this upcoming lending environment and I doubt anyone will really like them. It is important to caveat here and now, this is an opinion and is up to you to source your own opinion through your own various means. Here we go.
- Our more expensive end of the market will soften. I cannot see prices staying where they are with the lending environment changing.
- The more affordable end of the market will become more difficult to keep up with supply and demand for our ever increasing population. The harder financially it is for people to get into a home, the better and more realistic less expensive housing options become.
- Foreign Buyers (everyones favourite term) will gain an unfair advantage to our homes as we currently have a low Canadian dollar and in many cases, due to this low dollar, they will not need a mortgage.
- More people will jump into non-prime borrowing mortgages (think really high rate mortgages). Many home buyers with above-average debt, relative to income, will resort to higher-cost lenders who allow more flexible debt ratio limits and at the very least, more will choose longer amortizations (i.e., 30 years instead of 25 years). Non-prime lenders will also become pickier. Why? Because they'll see a flood of formerly "bankable" borrowers getting declined by the Big Six. That could force hundreds of thousands of borrowers into the arms of lenders with the highest rates.
- Less choice when renewing your mortgage. Under the new rules, if you no longer can qualify at a different lender, you are stuck to remain with your current provider. If your bank knows you can’t leave, I would think it would be likely they are not going to offer you up their best rates either.
Personally, I was in favour of the changes late last year to high-ratio borrowers, or those with less than 20% down, and thought it was a great move to strengthen the market long term.
With the new changes coming January 1, 2018, it will strengthen the market in a very long term sort of way, however, for the hundreds of thousands of home owners in the lower mainland in the short term, I would be prepared for the good times you have been enjoying for so long to come to an end.
Join us next month on my video series #DrinksWithDarin, where I plan to interview a top mortgage professional to get their take on what these changes mean to you, plus a few other extras. You can see the latest episode here, and check back to this blog mid November to see the newest episode.
Thanks for reading, until next time,