Alright, by this point we all know about the mortgage rules changing and the now implemented stress testing, right?
If no, and you’re in the market to buy or sell a home, you’ll especially want to get up to speed... But what does this all mean for the rest of you? The rest of the homeowner population not currently active in the buying or selling market?
Firstly... What Are The New Mortgage Rule Changes?
The Office of the Superintendent of Financial Institutions (OSFI), has set new rules on mortgage lending. It’s most commonly known as the minimum qualifying rate or, "stress test" for uninsured mortgages.
The new rules require that the minimum qualifying rate for uninsured mortgages be the greater of the five-year benchmark rate published by the Bank of Canada, which sits at roughly 5.14% OR the discounted rate the client is getting + 2.00% on top of that. (eg. 5 year fixed rate today: 3.34% + 2.00% = 5.34%).
The clients qualifying rate in this scenario would become 5.34% as it is the
higher of the two, make sense?
These new rules mean that even borrowers with a downpayment of 20% or more will face a stress test, which has already been the case for applicants of smaller down payments since October 2017.
Give it to me plainly, you say? Simple... you can’t have as much money to purchase a home as you could have had last year.
So why Did The Bank of Canada Change The Mortgage Rules?
In recent years, moves and tweaks have been made to tighten the rules around mortgages. The goal? To limit the amount of debt Canadians and financial institutions can take on. These new mortgage rules affect 10% of homebuyers, which is about 100,000 people who qualified for an uninsured home loan last year. Under the new rules, they have likely failed the stress test for an equally large loan this year and miss out on their preferred home.
Who Will This Affect The Most?
First-time homebuyers will be most affected. No matter how much money you save up or put down as a down payment, first-time homebuyers will have to pass the stress test. Most likely, this will result in a 20% decrease in affordability, meaning if your expectations are high, you might have to skip your dream home for something a bit cosier.
So What Can A New Homebuyers Do?
If you don’t pass the stress test, don’t stress!
Easier said than done, right?
But you still have a couple of options. The first option is to put down more money on a down payment to pass the stress test. This could mean waiting a little longer and waiting for your income to go up before you’re able to buy.
The second option, buy a smaller home, or maybe a condo instead of a detached home.
The third option is to add a co-signer to the loan that has income as well. Someone who can qualify under the new rules.
The bottom line is, make sure you understand the rules and where your income puts you under the new regulatory rules. Make sure to get pre- approved for a mortgage before you start your house-hunting. The last thing you want is the shock of being denied under the new stress test mid-house hunting, and have a major disappointment.
How The New Mortgage Rules Affect 20% Down Payments
If you’re thinking about buying a house within the next year or so, this may force you to settle for a less expensive home than you had your heart set on. In fact, the rules, in general, might force Canadians to look at homes up to 20% cheaper. Or you might have to wait longer and save up more for a larger down payment to make it work.
How The New Mortgage Rules Affect Mortgage Renewals
When it comes to renewing your mortgage under the new mortgage rules, lenders don’t have to apply the stress to clients.
However, what this means is that if you fail the stress test, you might not be able to shop around for a better rate.
This means that if you fail the stress test, you’ll probably get stuck renewing with your current financial institution, without being able to shop around for a better rate.
In some cases, you might be forced to accept non-competitive rates from your lender.
How The New Mortgage Rules Will Affect Mortgage Refinancing
If the plan is to refinance your mortgage, it’s most likely you’ll have to qualify under a higher stress rate rather than your existing mortgage rate. In fact, if you’re close to the borrowing limit, you might have to settle for a smaller loan.
So, here we are. Five months into the new stress testing rules, and what’s the fallout?
As a real estate agent on the frontlines of the Winnipeg market, I can say, well... not a whole lot. Properties are selling well, buyers are still aggressive and happy to find the homes they like, and the market feels to be moving right along.
With one noticed difference, the more affordable ranges of homes are selling well, very well in fact. It appears that the buyers in this fair city have not slowed their shopping, they’ve simply adapted, perhaps adjusted their sights slightly to a more comfortable affordability. So, I think it worked, for now. It has shifted the market of buyers slightly down the scale.
Furthermore, in all my years of experience in real estate, and exposure to many a buyer’s financial prowess, the majority hadn’t, and don’t plan on leveraging themselves to unenjoyable levels of debt. This generation of buyers feels to me a generation of experience seekers, with a goal to live a life of adventure. Not a life of debt mongering. So, did the Bank of Canada get it right? Will the attempted "forced" cooling of the market give the over leveraged Canadians a slap on the wrists, or a tug on the reigns? Time will tell... but so far, in Winnipeg, the time is telling me, my clients were not over leveraged to begin with.
So what does this all mean for the real estate market in Winnipeg?
I won’t expect a collapse of home prices, or any volatile swings in the market. Just a subtle shift in the trade winds, but the sails are taught, and the ship floats on, just fine.
If you need anything at all, I’m happy to help.