#39 New Mortgage Stress Test Rules - Bad For Homeowners Too

I read on CBC that "New mortgage stress test rules will block 50,000 people from buying [homes]". 

If you don't own a home but want to, what does this mean for you?

And...

If you own a home, what does this mean for you?

What is the mortgage stress test?

When you go to the bank to get a mortgage to buy a home, you will be offered an interest rate and maximum loan amount by the bank based on your personal credit score, your ability to make payments, and the length and type of your mortgage.

The new rules require uninsured mortgages (meaning home purchases with less than 20% down payments) to be tested for the greater of 2% above your offer interest rate or the 5-year interest rate. 

From OSFI (the federal regulator):

For insured residential mortgages, OSFI expects FRFIs (banks) to meet mortgage insurers’ requirements in regard to debt serviceability. 
For uninsured residential mortgages, FRFIs (banks) should contemplate current and future conditions as they consider qualifying rates and make appropriate judgments. 
At a minimum, the qualifying rate for all uninsured mortgages should be the greater of the contractual mortgage rate plus 2% or the five-year benchmark rate published by the Bank of Canada.

In plain English:

If you have at least 20% for your down payment - This doesn't affect you

If you have less than 20% for your down payment - This affects you. If you are offered an interest rate of 3%, the bank will see if your income can support an interest rate of at least 5%. 

For every $100,000 of a mortgage loan, that is an additional $166 a month in interest payments (at the beginning of your mortgage) that you will have to be able to pay with your income. 

So if you are applying for a $300,000 mortgage, that's an additional $500 a month in interest.

The Amount You Can Loan Drops By 20%

Banks determine how much to loan to you based your ability to pay your:

Property Tax

Condo Fees

Heating Bill

Mortgage Payments

The maximum these 4 items can be as a percentage of your income is 32%.

This means if your household income is $6,000 a month the most these can add up to is $1,920.

If your property tax is $200 a month, condo fees are $350, and heating is $75, this totals $625 a month. This leaves $1,295 a month for mortgage payments. 

If you are offered a 3% interest rate in the old rules, you would be able to get a mortgage of about $275,000.

But with the new rules, you would have to be able to support an interest rate of 5%, which means the amount the bank would loan you would drop from $275,000 to $225,000. Your ability to get a loan dropped by $50,000 or by nearly 20%.

 

If you don't own a home but want to, what does this mean for you?

If you don't have the 20% down payment.

The new rules come into effect on January 1, 2018. You can try to get a preapproval from the bank now and start your house search while falling under the old rules.

But beware that many others are looking to do the same thing. For such a big purchase, you don't want to be forced to make a quick decision.

Buying the wrong house could end up costing you more in the end.

If you are in Toronto, you can contact my friends at TorontoPropertyCouples (https://www.torontopropertycouple.com/). They can help you make a good investment decision.

The longer-term strategy is to start saving ruthlessly NOW! The federal regulators will make adjustments to their requirements in the future. If those requirements get more strict it will only make it harder to buy your first home.

Getting yourself into the category of people that can pay the 20% down payment is a very important step to securing your first home. The only ways to do that is to save money or win the lottery.

If you have the 20% down payment. 

You are in a great position. After the rush of uninsured buyers scrambles into the housing market, there will likely be a cool down period where there will be fewer buyers in the market.

This could be a great time to search for a home and maybe get a good price.

If you own a home, what does this mean for you?

This could be bad for homeowners.

Home prices are determined by supply and demand.

The more people that want what you have, the higher of a price you are likely able to charge for what you have.

If you own a home and are hoping to sell it, these mortgage rules affect the price you will be able to sell for. 

Uninsured buyers will only be able to get loans that are 80% of what they could have gotten previously. Smaller mortgages mean they have to look at smaller homes, or housing prices have to drop into their new lower price range.

Prices of homes will not necessarily drop by 20% since there are still all the people not affected by these new rules (i.e. people with at least 20% down payments)

It means that some homes that may normally get 10-30 showings and 2-5 offers may get only 5-20 showings and 0-3 offers.

With fewer people in the market, you may have less demand for your home, and as a consequence, those buyer's may not feel as much pressure to pay top dollar.

Check out my video on how to stage your home to get top dollar. 

 

Save Money Retire Early is written by Jon Lo, a barely 30 something change optimist, and personal finance guy. I believe anyone can be rich or poor, it's what you save that makes the difference.

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