Yesterday the Federal Government announced new rules aimed at limiting foreign money into Canadian real estate and ensuring that borrowers take on mortgages they can afford. While both have caused quite a stir, the latter definitely has some significant impact on first time home buyers and those who have not saved at least 20% for their down payment.
As of October 17, 2016, all insured mortgages must undergo a “stress test” that ensures a borrower’s ability to make their mortgage payments at a higher interest rate. Basically, borrowers who do not have a 20% down payment have to qualify for the higher interest rate. Their monthly payment is reflective of the lower rate, but should interest rates increase dramatically, they would have the ability to make that higher payment. The higher interest rate is based on the big bank’s five-year posted mortgage rates, which the Bank of Canada says currently average 4.64%. Anyone who already has a mortgage, or who has already applied for mortgage insurance, is exempt from the new rules.
For instance, using the TD Canada Trust current rate of 2.49%, a buyer today who is looking at a mortgage of $325,000, would need to be approved for a monthly payment of $1454. However, after October 17, that same buyer, without a 20% down payment, would have to qualify to make a payment of $1824. Quite a substantial difference! The actual payment would be $1454, but one would still need to qualify for $1824.
So here is the difference in qualifying – to get a mortgage of $325,000, with 5% down, with the rate of 2.49%, the buyer’s yearly income would need to be around $50,000. After October 17, with 5% down on $325,000 at the rate of 4.64%, their yearly income would need to be around $65,000. This scenario is a debt-free borrower, so if you start adding in other existing debt ie. vehicle, boat, credit cards, then your income needs to be higher yet! If the Feds really want to help us out, maybe they should make qualifying for all the big “toys” a little more difficult. Every payment counts and as you add these payments in, your yearly income needs to increase if you hope to get a decent priced home.
With information from CBC and TD Canada Trust.