New Mortgage Qualifications Make It Harder To Buy A Home
Until now, home buyers who chose the five year fixed rate mortgage could qualify based on the contract rate, not the mortgage qualifying rate. The contract rate was always considerably lower than the MQR.
This practice made mortgage qualifications easier for a larger mortgage. But with the housing market continuing to boom there has been a big concern that borrowers would not be able to make their payments when interest rates begin to rise.
These new measures aim to address this issue by limiting the amount of a mortgage for which a buyer can qualify by requiring that all buyers qualify based on the higher MQR.
What it means if you’re buying a home
Morneau’s change to mortgage qualification rules will be retroactive and apply to any new mortgage created on or after October 17, 2016.
That means if a homebuyer were to opt for a five-year mortgage, at 2.4%, they’d have to prove to the lender that they could make monthly mortgage payments based on the 4.65% MQR. On a $650,000 home, with 10% down, that would mean this homebuyer would need to show that they could increase their monthly mortgage payment by almost $700 per month, in order to qualify for that mortgage.
According to RateHub.ca’s mortgage affordability calculator, a family with an annual income of $100,000, with a down payment of $40,000 and using a five-year fixed mortgage rate of 2.17% will qualify to purchase a home worth $665,435. (Assumes property tax of $400 and monthly heating costs of $150.)
Under these new rules, this same family would have to qualify for a mortgage using the posted rate of 4.64%. This would drop their home purchase price to $505,762—a difference of $159,673, or a 24% reduction in the home purchase price.
The rationale for using the posted rate to qualify buyers is to “…protect Canadians by ensuring sufficient flexibility to support mortgage payments at higher interest rates in the future, for example, when the mortgage term is up for renewal. This requirement also protects taxpayers who support homeownership through government-backed insured mortgages,” explained the Department of Finance through email. – Money Sense
Why Is The Government Making This Change?
Between recent changes requiring lenders to hold back more money in their own reserves to cover potential defaults should markets correct (covered in our post called, Getting A Mortgage In Canada May Get Tougher!), and the changes this month affecting the buyer’s ability to qualify directly, it is becoming more difficult to get a mortgage in Canada.
What is behind these major changes in Canada’s mortgage lending requirements? Here is Bloomberg’s assessment.
Officials are attempting to cool Vancouver and Toronto real estate prices, without harming other regional markets, in a bid to make homes more affordable and ease chances of a crash. The steps announced Monday add to a series of similar measures laid down since the 2008 financial crisis, all of which have so far failed to halt steadily rising prices.
Morneau’s latest moves “could raise mortgage costs, thus damping home sales,” Sal Guatieri, senior economist at Bank of Montreal in Toronto, said in a note to clients.
Years of surging prices, a condo construction boom and low borrowing costs have drawn warnings that gains in the nation’s two most expensive markets probably aren’t sustainable, presenting a risk to the financial system. Nationally, home prices rose 15 percent in August from a year earlier, according to the Canadian Real Estate Association, up 31 percent and 17 percent in Vancouver and Toronto.
“Canadians have told us they are concerned about growing household debt and rapidly rising house prices in some of our biggest cities, particularly in markets like Toronto and Vancouver,” Morneau said. – Bloomberg
Are you considering buying a home in Canada?