How new mortgage rules will affect first-time buyers

New mortgage rules will affect first-time buyers

By Special to MoneySense on October 6, 2016
Estimated reading time: 3 minutes

Those with less than 20% down will qualify for a lot less

OTTAWA – Canada’s first-time home buyers may have to shelve their dream house fantasies due to lending changes announced this week by the federal government, mortgage brokers say. Ottawa moved this week to tighten mortgage lending rules that will limit the amount many Canadians can borrow to help ensure that when interest rates rise, they’ll still be able to make their payments. Mortgage broker Frank Napolitano says that means the size of mortgage many buyers will be able to qualify for will be less once the rules take effect on Oct. 17. “First-time homebuyers will probably have to probably scale down the type of home that they may have planned to buy,” said Napolitano, managing partner at Mortgage Brokers Ottawa.

Mortgage insurance changes coming

Under the new rules, a stress test that had only applied to borrowers who opted for variable rate mortgages or fixed rate mortgages with terms less than five years will now be used for all home buyers with less than a 20 per cent down payment. That means borrowers must be able to qualify for their mortgage using a higher interest rate than they will actually be paying on their mortgage. The advertised special offer rates for a five-year fixed rate mortgage at Canada’s big banks are around 2.5 per cent. However, the Bank of Canada-posted rate used in the stress test is 4.64 per cent based on the posted rate at the big banks. “You’re not paying more, but you’re going to be able to buy less house,” Napolitano said. The idea is that potential home buyers must be able to show that if interest rates were much higher than they are today, they’d still be able to make their mortgage payments and other costs related to home ownership. Napolitano used an example of a Canadian earning $70,000 a year with enough saved for a five per cent down payment, and carrying $500 a month in non-mortgage monthly debt payments such as a car loan. Based on a five-year fixed-rate mortgage of 2.44 per cent, he estimated they could qualify for a loan that would allow them to buy a house worth about $370,000 under the old rules. However, under the new stress test using 4.64 per cent, Napolitano estimated that same home buyer could only afford to buy a home worth about $280,000. Jason Scott, a broker with the Mortgage Group in Edmonton, says many of his clients would not have qualified for their mortgages under the more stringent rules. He noted that it isn’t uncommon for nervous lenders to turn down borrowers who just barely qualify or require a co-signer or a larger down payment.

No more discounts for fixed-rate mortgages

“People who have less than 20 per cent down are going to qualify for a whole lot less money,” Scott said. Napolitano said for some buyers, the changes may mean that they will have to settle for a less expensive property, save for a larger down payment or wait until they are earning more in the future. “I think it’s going to take some people out of the market,” he said. “There’s no question that some young Canadians that had aspired to buy a home, may have been ready to buy the home this year, but now I think they may have to wait.”