The New Mortgage Rules; The Good, The Bad and Ugly
The Canadian federal government recently implemented new rules for mortgage lending that are sure to impact those relocating and planning to buy homes in Canada. These new rules regulate bank lending practices, cool down the housing market, and decrease the average Canadians spending power when buying property.
These rules will mean, as example, that if you make $70,000 yearly, you will qualify for a mortgage of only $280,000 as opposed to under the previous rules where you would have qualified for $370,000. The difference in price points can change the size of the house and neighbourhood you will be able to afford.
This will affect all buyers looking to purchase property in Canada, including relocating employees. If you are relocating to Canada, here’s a breakdown of what these new rules entail.
The Purpose
This change came after the low interest rates and hot property market caused a boom in the prices of properties across the country. Aaron Phinney, a mortgage broker at Mortgage Intelligence, explained that the “new stress test is aimed at limiting how far individuals extend themselves, and slowing the market more than it is aimed at avoiding rate shock.” The stress test will limit the maximum purchase price for a buyer and impact a buyer’s ability to purchase over list, curbing aggressive bidding wars and slowing down price jumps in the housing market.
“I want to make sure we are proactive in assessing and addressing the factors that could lead to excess risk.” -Bill Morneau
However it is undeniable that the new mortgage rules coupled with the stress test have been put in place to safeguard the Canadian Economy from mimicking the American subprime mortgage crisis. Federal Finance Minister Bill Morneau commented, “I want to make sure we are proactive in assessing and addressing the factors that could lead to excess risk”. These new rules will ensure that fluctuation in interest rates does not render an individual’s mortgage commitment unaffordable, thereby preventing foreclosures.
The Process
To determine the amount a home-buyer is qualified to borrow, each applicant will undergo a stress test. This stress test is not new to the real estate market; however the stipulations behind it have changed.
Under the new federal rules, applicants with less than a 20% down payment for their real estate purchase will be subject to a stress test that will assess their ability to afford an inflated interest rate. This stress test will assess a borrower’s ability to pay, based on their salary, a benchmark interest rate of 4.64%. Phinney warns that by “requiring all high-ratio mortgages to qualify at the benchmark rate, many home buyers will see up to a 20% reduction in the amount they qualify for”.
The stress test will also still apply to its original demographic of individuals that opt for a mortgage term of less than five years, regardless of whether their mortgage rate is variable or fixed. The rule now “applies to all high-ratio mortgages, regardless of rate or term. In Canada, as a general rules, a mortgage is considered ‘high-ratio’ if the mortgage exceeds 80% of the value of the property”.
What This Means
The new federal rules will affect every home buyer. While a buyer’s financial burden will not increase; the stress test will push down the price points of many home buyers significantly. This means buyers will be limited in what they are able to afford. This will hold true for individuals and families who are relocating for work.
The new rules may reduce the number of buyers in the market because many may no longer be able to afford a home that meets their needs. Other buyers may opt to wait longer in order to contribute higher down payments to forego the restrictions of the stress test.
Considerations While Relocating
When you relocate to Canada there are many things that you must consider in regards to purchasing a home. Will you be able to afford the same sized home that you currently reside in? If you don’t have the sufficient funds to contribute a down payment of 20% to avoid a stress test, will your employer top up your contribution? If you plan to contribute under 20% to your down payment, will the stress test limit your options?
Phinney states that “there is really no bad time” to buy a home in Canada. “Economists have no expectation of either a slump, or a bust in housing prices, but rather just more modest property value increase”.
Discussing these concerns with your company before accepting your relocation to Canada will ensure that you are not blindsided.
If you are relocating to Canada, TransferEASE can help. We are proud members of CERC and are an ISO 9001:2008 registered corporation.
At TransferEASE our knowledgeable relocation experts can help guide your relocation from start to finish, with care and attention.