Changes Coming on October 17th, 2016

I hope you had a wonderful Thanksgiving weekend!

You possibly heard on the news that the Government is introducing new mortgage rules on October 17th. These rules affect home buyers who are applying for a mortgage with less than 20% down.

To sum it up, now all homebuyers with less than 20% down will have to be qualified for a mortgage at a much higher rate. This rate (benchmark rate or 4.64%) is for qualification purposes only.

It is the so-called “stress test” to ensure the buyers could handle possible rate hike when the mortgage comes to maturity 5 years from now.

We have been already using benchmark rate to qualify for a term less than 5 years and for a variable mortgage.

Starting October 17th, banks will have to use the same benchmark rate to qualify for a fixed rate on a 5-year closed term.

The new rule significantly reduces the mortgage amount homebuyers could be approved for.

In some cases by 20% from the original amount!

For instance, if a person is making 70,000 per year and has no debts, prior to October 17th, with 5% down his maximum purchase price is approximately 384,000. After October 17th, the price drops to 304,000.

New rules possible outcome:

1. In my opinion, we will see real estate price reduction. Cheaper homes, starter homes, and condos will benefit the most from these rules, since this type of real estate will be more affordable.

More expensive homes, estate homes, move-up homes will most likely see less demand.

2. First-time homebuyers will be affected the most. In other words, your grown up children will most likely stay at home longer.

3. Single income families, newly divorced buyers with less than 20% down will be forced to settle for a much cheaper home than they could originally afford.

4. Higher demand on rental market with rent possibly going up

These measures may be necessary to address affordability issues in Canada’s hottest real estate markets, like Vancouver or Toronto, but they could have a very detrimental effect in the markets that are already very sensitive to any new changes due to the current economic downturn.