One of the best pieces of advice you can give to help a realtor get more listings is to put in the time and network, network, network. For a prospective homebuyer who needs a mortgage to purchase their first home, one of the best things they can do is familiarize themselves with Canada’s new mortgage regulations and how they’ll affect their purchasing power. So feel free to pass this correspondence along if you know anyone it might benefit.
It was late last year that Canada introduced its new mortgage rules, and the term that was used for them was ‘promoting responsible homeownership’ – which in large part means more of buying a home to live in it rather than as as a speculative investment purchase. So while the changes were geared toward curbing foreign real estate speculation and, to a lesser extent, promoting low loan-to-value mortgages, for the majority of Canadians what matters first and foremost with the new regulations is how it will affect affordability for the average Joe or Jane.
More specifically here to put some parameters on our discussion, let’s say they’re a first-time homebuyer purchasing with less than 20% down. Or what’s called the interest rate stress test.
Let’s also preface somewhat by looking at how the affordability of Homeownership has been helped in recent years by low interest rates and the availability of high loan-to-value mortgages backed by mortgage insurance. What would be the result, however, if those rates jumped as they’ve been known to do? The government’s response to what could potentially be a bubble bursters was to introduce tougher interest rate stress-test criteria in the latter part of 2016, aiming to make perspective homebuyers aware of the potential for a future rise in interest rates.
So if you’re an average homebuyers with the on-paper means to afford a home – but not endlessly deep pockets – what does all this mean for you? The less-than-rosy answer is that you’ll likely have less money to work with. Here’s why.
Taking The Stress Test
Lenders and mortgage insurers will weigh two debt service ratios when qualifying you for a mortgage and mortgage insurance.
-Gross debt service (GDS)
These are the carrying costs of your home, such as mortgage payments, taxes, heating, etc., and how they stand in relation to your income.
-Total debt service (TDS)
The sum of your home carrying costs (mortgage payments, taxes, heating, etc.) plus your debt payments (credit cards, student loans, car loans, etc.), with all being measured in relation to your take-home income yearly.
To qualify for mortgage insurance, the highest allowable GDS ratio is 39%. The highest allowable TDS ratio is a little more accommodating, coming in at 44%.
Many prospective buyers will technically at least qualify for a fantastic five-year fixed mortgage rate from your bank (2.94%, for example), but it’s now important to keep in mind that the new rules use the Bank of Canada’s five-year fixed mortgage rate (4.64% at the close of 2016, for example) to make a determination on whether you can afford your mortgage payments.
The purpose of this stiffer affordability standard is to serve as a buffer to test whether you could still afford your regular mortgage payments if (and some economists state it’s quite likely) interest rates were to rise dramatically.
Bottom line is, the new rules mean you can afford less house for your income – approximately a 20% to 30% reduction in the mortgage amount most first-time buyers would qualify for.
Best Plan For Prospective Buyers
These new mortgage rules will likely not be reevaluated for many years now. However, many buyers will still be able to work within them. A revision of plans or timelines may be needed, but first-time homebuyers can still get into the real estate market.
Smart prep work in advance of buying your first home will be to lay the groundwork for this responsible homeownership they speak of: start by reducing your consumer debt, saving for a larger down payment (a big one!), and finding a way to boost your overall financial fitness.
Help your clients with their mortgage needs by recommending them to a mortgage broker you trust, and see to it you have more clients to refer in the first place by checking Real Estate Leads Availability here and having qualified online-generated leads in your area provided to you exclusively.
