Everyone is curious wanting to know how will the new mortgage rules affect the Real Estate Market? Again, my crystal ball is on the fritz. But…. Let’s try to understand what those new rules and regulations look like. Who better to explain and simplify them? Joanna Lang Managing Partner Outline Financial. (I’ve let her borrow my byline for the month.)
The start of a new year always brings with it feelings of optimism and the chance to embrace new opportunities. But this year many home buyers awoke from an evening of champagne and Auld Lang Syne to a nasty hangover in the form of a new—and considerably less friendly—mortgage lending environment.
The Office of the Superintendent of Financial Institutions’ (OSFI) new rules for obtaining mortgage financing came into effect on Jan.1, 2018, and could dramatically impact many buyers’ ability to purchase or refinance a home.
The good news is that with the right advice, purchasing your dream home is still a possibility. By building the right team—led by an experienced realtor and mortgage agent—you can dramatically improve your chances of navigating the market and securing the right financing.
Many Canadians will need as much help as they can get.
That’s because OSFI has introduced a new minimum qualifying rate, or stress test aimed at those with a down payment of 20 per cent or more.
Until now, if these purchasers selected a five-year fixed term mortgage, they could qualify using a mortgage payment based on their actual interest rate (around 3.24% at the time of writing this article). But under the new rules, those same buyers will need to qualify based on an inflated “stress test” mortgage payment calculated at the higher of the Bank of Canada benchmark rate (4.99% at the time of writing this article) and the actual interest rate plus 2.00% (which would be 5.24% in this example!)
The new stress test will diminish the purchasing power of some home buyers by as much as 15 to 20 per cent, while also making it more difficult for others to refinance a mortgage. As we said earlier, this may be tough news for buyers, but there are ways to overcome the challenges posed by these new lending requirements.
Our first piece of advice is to sit down with your mortgage agent, realtor, accountant and other trusted financial advisors to fully understand your financial situation. What can you really afford? And we don’t mean simply making monthly payments. Many buyers overlook the lifestyle implications when they overextend their finances by taking on an expensive mortgage. That’s why it’s so important to set a home-buying budget and get pre-approved for a mortgage early in the process. Then use that financing figure as a guideline to understand exactly how much home you can afford to buy.
If you fail a mortgage stress test, your home-buying journey isn’t over. But you should be prepared to consider options such as putting down a larger down payment, if self employed speak with your accountant to review your income declaration/calculations for the year, or have someone co-sign the mortgage with you. The latter is an option used by many first-time home buyers who work with a parent or relative to help them achieve their dream of home ownership. It can be a worthwhile option if you have family able and willing to help.
Also, consider your home-buying options carefully. If you don’t qualify for a mortgage for a home in a specific area where prices are higher, consider other, less expensive neighbourhoods. In some cases, renting might be the next best option until you can save a greater down payment or until you climb the career ladder and grow your household income.
And just because a bank has thrown cold water on your plans, remember that you have options. A mortgage agent is trained to understand the financing landscape and has access to not only banks but also other lenders such as credit unions, mono-line lenders, trust companies, and public or private lending institutions which all carry their own unique qualification guidelines and may offer relief for home buyers.
Mortgage lending rules may have changed, but home buyers still have opportunities this New Year. Don’t think of the new OFSI’s new stress test as a barrier to achieving your lifestyle goals. Instead, think of it as a tool to help you understand the mortgage you can afford. Because buying the right home now could set you up for financial success in the years ahead.
Looking for more information on the new mortgage lending rules? Contact us today!
Jennifer Greenberg is a broker with Royal LePage Real Estate Sales Services, a mom and an active supporter of the St. Clair West Community.
Joanna Lang is a mortgage agent and owner of Outline Financial (www.outline.ca), a mom of three and an advocate for various charities within the community.
By Joanna Lang