The federal government has announced new mortgage “stress tests” and changes to the capital gains tax to help stabilize hot real estate markets like Vancouver and Toronto. These changes will be coming into affect as early as October 17, 2016. Our friend and mortgage broker Deshka Peneff breaks down the changes and how they may affect you.
Federal Finance Minister Bill Morneau unveiled sweeping changes that will affect all sectors of the housing market, including rules aimed at slowing the flood of foreign money into the market and stricter borrowing qualification requirements from lenders. The changes can be viewed here.
This means that borrowers have to qualify at a higher interest rate than what they’re actually getting. Previously, the only “stress test” that was done this way was for variable rate mortgages and for any mortgage terms less than 5 years in length. Now, 5 year fixed mortgages will be qualified at the current benchmark rate of 4.64% (Bank of Canada 5-year Posted Rate). This means it will now be just as hard to get a 5-year fixed rate as it is to get a variable or shorter term mortgage. Also, all mortgages will now have to be qualified at a 25-year Amortization, regardless if the borrower chooses to take a 30-year amortization on their mortgage.
Mortgage applications completed by the lender prior to Oct 17th 2016 are fine. See the roll out technical link here.
If You Have A Pre-Approval it may be void after the changes, so you definitely want to check how this will impact your purchasing power.
Even if you have a 20% down payment, you may have to qualify using a 25 year amortization instead of the 30 year used to qualify you previously.
As An Example:
Before the changes, a household income of $80,000 would qualify you for a mortgage of about $500,000 using a 5-year Fixed Rate qualification. With the changes as of October 17th 2016, you will then need a household income of $100,000.00 for that same mortgage amount.
If you’re trying to obtain a mortgage that hasn’t been finalized yet, verify what changes are applicable to you. The ripple effect may mean a decrease in your property value and your ability to refinance. To place this into perspective, in 2008, fixed rates were 5.99%. This is still much higher than the current qualifying rate of 4.64%. Interest rates that borrowers will actually get are still expected to remain near record lows.
If the market changes and rates increase, it’s harder for existing Canadian borrowers to say that they now can’t afford the mortgages for which they were approved due to the fact that they were qualified using a much higher rate than what they were actually receiving.
Let this also be a reminder of how choosing a completion date that is more than a month away can be risky, especially in times like today when guidelines can change very rapidly.
Deshka Peneff, Mortgage Broker