Early in the new year, we are expecting to see federal government regulators introduce more restrictive lending rules that will affect how you apply for your mortgage.
What are the new rules expected to be?
In a nutshell, it looks like anyone applying for a mortgage with one of Canada’s federally regulated lending institutions (all banks, and federally incorporated trust and loan companies) will need to qualify for a mortgage at a full 2 percentage points above the rate of the loan they actually take.
Who will the new rules affect?
All borrowers, even if they have more than a 20% down payment (those with less than 20% down have been subject to this “stress test” for a while now).
Who are the new rules designed to protect?
The banks and lenders. The government is concerned that if too many homeowners were to default on their mortgages because of rising rates, the banks themselves would be at risk (witness the US banking crisis of a few years ago). To a lesser degree, borrowers will also be protected from over-reaching, but these measures are really designed for the stability of the banking system.
What will be a typical result of the tighter rules?
For a $400,000 mortgage where the borrower pays an actual rate of 2.9% (actual payment $1,873) they would have to qualify at a rate of 4.9% – where the theoretical payment would be $2,304 per month, a difference of $431 a month which needs to be covered by income.
What unintended consequences might we see because of the new rules?
Some home buyers will no doubt decide to borrow outside the federally regulated lending system; because of this they might be forced to pay a higher real rate, putting themselves at more risk instead of less.
Others may choose mortgages with shorter terms or more restrictive payout clauses (because these typically come with lower rates) making them more susceptible to rising rates than those who lock in for a longer period.
And, most importantly, we would expect to see home prices soften somewhat to adjust to the lower amounts buyers can finance. But we’ve expected to see prices soften before, and they haven’t yet!
Contact Jeff to discuss how these changes may affect your decisions if you are planning to buy in the spring.
