The New Mortgage Rules and First Time Home Buyers
2016-10-04 | 11:29:02
The mortgage world was aflutter yesterday as a new rule was announced by the Minister of Finance. A new rule that blindsided us all, we all knew something was coming, but we didn’t expect it to be this. We’ve all seen the media stories the last year or so, headlines about a bubble, foreign investment, and doomsday predictions about the Canadian housing market. The Feds obviously felt that they had to appear to be doing something, the question is---is this the right something?
Now keep in mind I don’t speak for the entire mortgage industry, but I did spend my evening yesterday reading articles, watching the news, and checking in on my online industry forums. While the reactions are mixed and some heads are cooler than others, the general consensus seems to be this: This is going to hurt first time home buyers. How you ask? Let’s break this down:
First let’s look at the new rule as stated on the Department of Finance Canada’s website:
”Effective October 17, 2016, all insured homebuyers must qualify for mortgage insurance at an interest rate the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate.” (Full announcement can be found here)
What is an insured home buyer? An insured home buyer is anyone who is purchasing a property with less than 20% down. There are three major insurers in Canada, Canadian Mortgage and Housing Corp (CMHC), Genworth Canada, and Canada Guaranty. According to a poll done by Genworth and Environomics “[s]ixty-three percent of today’s first-timers get insured mortgages with the median down payment being $34,000 (12%)” (Canadian Mortgage Trends, click here for the full article posted April 8, 2015). So it is safe to say that insured mortgages make up a significant chunk of first time home buyers. With this new rule all of those first time home buyers now need to qualify for that insured mortgage at a rate of 4.64% (the current benchmark rate) as opposed to the actual contract rate of 2.49% (rates vary lender to lender and product to product and are subject to change at any time). How does that translate to a person’s ability to buy? Here’s how:
I live in the beautiful town of Nanaimo, BC on Vancouver Island, so I am going to use numbers based on that regional market. September 2016 stats show a median sale price of $421,000 (courtesy of VIREB). Let’s use a down payment of 10%, so that would be $42,100 resulting in a mortgage of $387,993.60 after the insurance premium is factored in. Under the current rules we could use the contract rate of 2.49% resulting in a necessary income of $62,000 annually to purchase this home. This is also assuming the person is carrying no other debt. Under the new rules we now have to qualify this person using the benchmark rate, which means that now to purchase this average home a person would need an annual income of $76,000. Again this is assuming there are no other debts and we have amortized both mortgages over 25 years. That is an increase in income of $14,000 annually, that’s a 22% increase in income necessary to purchase the exact same home. That my friends, is how these new rules are going to affect the average Canadian home buyer, it is now harder for hard working Canadians to enter into the housing market.
In my humble opinion there are so many other ramifications that I can’t even begin to explain them all in one blog post. I understand that there is concern around what is happening in Vancouver and Toronto, but my question is: why does the rest of Canada have to pay for what is happening in two of our hundreds, if not thousands, of regional markets? The single mom who now can’t purchase a home of her own, the hard working lower income couple who just want to raise their family in a home they can call their own, and the thousands of other every day Canadians who were just removed from the housing market. The more I delve into this topic the more questions I have as to why the Department of Finance thinks this new rule is good for Canadians.