If you are currently invested in the real estate market, or if you are simply concerned about finding or keeping a roof over your head, you’ve likely heard about the new housing insurance rule changes that come into effect this week.
These changes are aimed at protecting the financial security of Canadians and supporting the long-term stability of the housing market in Canada.
They are meant to respond to the effects of years of low interest rates and changes in the way the market operates.
The Federal Department of Finance has rolled out three new rules relating to this, but only the “mortgage rate stress test to all insured mortgages” (which came into effect on Monday) affects a borrower’s purchasing power. So this is the one I’ll examine today.
An insured mortgage is a mortgage where a borrower has less than a 20 per cent down payment. Before this new rule, clients could qualify for a mortgage using different interest rates depending on the product. For terms less than five years and/or variable rate products, one could qualify at the Bank of Canada’s conventional five-year fixed posted rate (currently 4.64 per cent). If they were to choose a five-year fixed rate product, however, they would be qualified at the contract rate (the rate at which they are actually paying interest). These days, some contract rates for five-year fixed mortgages can be more than a couple of per cents less than the Bank of Canada rate.
The new rule has made the Bank of Canada rate the minimum rate used for qualification calculations, regardless of the product or term. This significantly reduces purchasing power because borrowers will now have to come up with much larger down payments or have higher incomes to qualify for the same mortgage amount.
Let’s look at an example:
A few weeks ago, Mr. and Mrs. Snug were looking to purchase a property on the island that they love and call home. They have an annual household income of $100,000 and have managed to put together a down payment of $30,000. They find their dream home listed at $599,000 and head to their friendly local mortgage broker, or First Credit Union. Their chosen institution runs the numbers and finds that they’re good to go, as the required annual income to qualify at that point was around $96,000.
Fast forward to today. The same scenario would have Mr. and Mrs. Snug out of luck, as their required combined annual income is now over $120,000. In order to purchase their dream home they would have to come up with another $80,000 for their down payment, or would require a co-signer on their application. Keep in mind that nothing would change with respect to the mortgage itself as the interest rate they’d receive is the same and their monthly mortgage payments would be the same. The Department of Finance just wants the “stress test” qualification to show that you can handle your payments should the interest rates rise significantly in the near future. In real terms, this translates to approximately a 20 per cent reduction in purchasing power.
On Bowen, many renters are being forced out of their homes because their landlords are selling. They dream of owning their own home, if for no other reason than the lack of security of our current rental market. This new mortgage rule, resulting in a dramatic drop in purchasing power, is not only unfortunate but in consideration of the rental market as well, could be forcing families and residents without large down payments and higher incomes off island entirely. There are some real implications to consider for our neighbours and communities.
The government has a history of implementing changes, and then retracting them with enough public outcry. So we all have a say in policy changes. If you’d like your purchasing power back, please take the time to share your voice. Reach out to our local MP Pam Goldsmith-Jones ([email protected]).
For more information on the changes, Dominion Lending Centres has a great summary that can be found here:
dominionlending.ca/newrules.
Aaron Davison is a mortgage broker with Dominion Lending Centres Origin, living on and loving Bowen Island. He and his wife Harmony are expecting their first baby any day now. He can be reached at 604-947-0448, [email protected] or facebook.com/aarondavisonmortgageteam.
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