The Liberal government published new mortgage rules aimed at cooling the overheated Canadian real estate market. The rules are to ensure Canadians are not taking on more mortgage than they can afford. Here is a brief breakdown of these new rules and how they will affect your purchase.
A “stress-test” will be applied to all high-ratio mortgages. Meaning those buyers with a CMHC or Genworth insured mortgage (less than 20% down) will have to qualify for their mortgage at a higher rate. Previously, buyers could qualify at the lowest fixed rate a bank or broker could get them, example: 2.49% on a 5 year term. Now, buyers will have to qualify at the Bank of Canada’s posted rate. As of October 3, 2016 the posted rate is 4.64%.
Simplified Example (not taking taxes, heating costs and debt into account)
If a buyer’s monthly income is $5,000 and they previously qualified at the 2.49% rate, they would qualify for a mortgage of $357,567.
They would now have to qualify at the Bank of Canada posted rate of 4.64%, reducing the amount they would qualify for to $285,061. A significant reduction in purchasing power.
In my opinion, the government is priming the market for an interest rate increase in the 1-2 year time frame. These new rules will ensure those buying a home will be able to afford the payments when interest rates do rise. An increase in the interest rate is inevitable, it has been artificially low for a significant period of time and the current rate of growth in housing prices is not sustainable.
These new rules are good fiscal policy and will ensure market stability in the years to come.