New Mortgage Rules – How Does it Affect You?
24 Oct 2016
New Mortgage Rules
The Liberal Government’s Finance Minister Bill Morneau implemented new legislation effective October 17, 2016 that impacts the buying power of Canadian Home Buyers.
The purpose of the legislation was voiced as being implemented to provide a “stress test” for Home Buyers to protect them against potential changes in interest rates. It is also believed that part of this legislation was designed to decrease overheated housing markets in cities like Toronto or Vancouver, as broadly overheated housing markets is by no means a National issue. The impact of these changes has significant implications on the buying power of the working class in Canada as those with high liquid incomes will not be impacted by these changes. A big winner in this legislation change is the top 5 banks in Canada as they have had a competitive disadvantage against non-traditional lenders who have more competitive interest rates that could be used in turn for pre-qualifying home buyers for a higher purchase.
The Governments actions in principal seem sound, to protect Buyers against rising interest rates; however, they have gone overboard and implemented these changes with no real industry pre-consult in my opinion (this opinion seems to be that of the industry as well). Lastly, the loser in this equation is the working class home buyer as their buying power; at the stroke of this bill signing has been significantly reduced. The impact is most felt in smaller markets where effects of this legislative change are quite significant. In Kingston Ontario for example, the average home price is around $320,000. Now let’s say you qualified for a home with the average price of $320,000 based on current five year interest rates (as low as 2.3%). Following this legislative change you now only qualify for a home with a price of $258,000 (20% below the average sale price). Your home buying power has been reduced by $62,000. From an income stand point you would need to go from making $66,949 to $80,977 to buy the same home you could have prior to the legislation change.
Let’s put some perspective to the change by starting with the approval process before the new legislation was implemented. Here are some points of consideration prior to the change:
- If you wanted a variable rate mortgage (the lowest rates available) you had to meet the new legislation guideline and qualify for your mortgage based on the Benchmark Rate
- If you didn’t want to take a variable rate mortgage you had to qualify based on current mortgage rates, posted 5 year term.
The last point has the most impact as prior to the new legislation change you could qualify based on the best available 5 year rate which was as low as 2.3%. Further and this is the key point here is that the banks bench mark posted 5 year rate is not what anyone pays. The 5 year posted as of today’s date is 4.49%; RateHub‘s current five year rate is 2.19% a full 2.3% lower. The reality of all this is that the posted rate is just not reality! What the Finance Minister has done is index all mortgages to a fictitious rate that no one pays. Don’t get me wrong I support responsible mortgage lending rates but if the principal of the legislation was to save us all from an interest rate rise they could have set the approval level at 1% above the best 5 year rate available; banks wouldn’t like it but who cares? Legislation should be about consumers! This would provide a 1% hedge against interest rate growth, which given inflation is running at 1.3 to 1.4% seems to be a prudent defence against interest rate changes to protect consumers. So how does this legislation change actually impact consumers if interest rates rise? Let’s look at our example and apply a 0.5% and 1 % interest rate rise to our buying power of our consumer who could afford $320,000 home prior to this legislation change that following was reduced to $258,000.
- If interest rates rise 0.5% that same consumer is reduced to a qualifier benchmark (fiction) rate of 5.14% and now qualifies for a $246,000 home (from $320,000 to $246,000)
- If interest rates rise 1% that same consumer is reduced to a qualifier benchmark (fiction) rate of 5.64% and now qualifies for a $235,000 home (from $320,000 to $235,000 – essentially one $100,000 drop in buying power, which in a market where average price is $320,000 is a home a world away from where you were)
For our $320,000 purchase example and current 5 year rates the monthly mortgage payment is $1,394 but the Finance Minister wants to qualify you at a $1,768 payment ($374 more per month!). If interest rates rise 1% (100 basis points) your mortgage would go to $1,473 which is $79 more however the Finance Minister wants you to be qualified in this instance for a payment of $1,948 which would be $554 higher.
Does it not make more sense to legislate that your qualifying rate be 1% higher than best available five year rate or like the bench mark rate, does reality matter? If you have a position on this I encourage you to reach out to any of the following or your local MP, these are our elected officials our voice matters!