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The New Mortgage Rules: What are They and How do They Affect you?


Late last year, the federal government announced a major shift in Canadian mortgage rules. With the new paradigm now firmly in place, it’s time to take a look at the fine print, and how it affects us all.

Providing clarification on the ins and outs of the rules are Nathan Mol, Realtor, Liv Real Estate, and Lori Hutson, mortgage associate, Regional Mortgage Group (affiliated with Dominion Lending Centres).

“Insured mortgages with less than 20 percent down have to pass a ‘stress test’ and qualify at the Bank of Canada’s five-year posted rate, which is 4.64 percent today,” adds Hutson. “This results in qualifying for up to 25 percent less.” Hutson also notes that the Bank of Canada’s qualification rate includes a 25-year maximum amortization, a $1 million purchase price cap and that the property be a primary residence, which means occupied by the owner(s), not rented out or used as a vacation home. “This will result in decreased options as lenders need to amend their guidelines to meet federal criteria, resulting in restricted insurance for low ratio or conventional mortgages,” informs Hutson.

Mol notes. “It has reduced the price of the home that home buyers (with a down payment of less than 20 percent) can afford by about 20 percent, depending on the situation. This means that, previously, many first-time buyers that were looking at homes in the $450,000 price range now can only qualify for a mortgage with a purchase price of around $370,000.00. Likewise, a first-time buyer who previously had a max price of $400,000 would now qualify for $320,000.

“These prices are significant since they reflect typical entry price points for a new suburban single family detached two storey, three-bedroom home with a double attached garage, or smaller detached two-storey homes with rear detached garages. As a result, first-time buyers will either need to save up for several more years, or adjust their price point lower and adjust their expectations towards an older house, a half duplex, or a townhouse. It all depends on the neighbourhood, age, and house condition. Older bungalows can still be found for $350,000 and up, half duplexes from $320,000-$370,000, and townhouses from $250,000-$350,000.”

These measures may seem drastic, invasive and even punishing, but they are there for a reason.

“Measures had to be taken against the recent trend of house flipping to avoid property transfer tax from investors,” says Hutson, talking about the sharp rise in real estate investors that purchase an older home, fix it up and sell it at a profit while avoiding capital gains taxes.”

That’s not the only reason for the rules, however.

“If interest rates rise, home owners will still be able to afford their mortgage payments,” Hutson points out.

Hold on. Isn’t home affordability the responsibility of the homeowner? Typically, the answer would be yes, but a look back to the events leading up to the 2008 recession reminds us all that easy, cheap credit and huge, expensive houses create a recipe for disaster. The federal government is taking steps to ensure that Canadians only buy what they can actually afford, so if interest rates rise, homeowners can continue to make mortgage payments.

The new rules have been in effect for a few months now, and Mol can already see the difference.

“Based on my experiences, as well as discussions with other agents, I can see the rule changes have a larger impact on entry priced homes in newer neighbourhoods rather than in more mature neighbourhoods,” says the Realtor. “I have found that most of my buyer clients in more mature central neighbourhoods typically have 20 percent or more for a down payment, versus the newer suburbs where 5-10 percent is more common.

“I thought I would dig a bit deeper and compared 12 months of average sale prices in two housing category types leading up to Oct 17, 2016, when the rule changes took place, versus the average sale price that occurred between Oct 17, 2016, and January 20, 2017. I compared two-storey, three-bedroom single family detached homes with double attached garages built in 2010 or newer against three-bedroom bungalows less than 1,200 square feet above grade with double detached garages that were built prior to 1980. Since the rule changes were implemented, the newer two-storey homes’ average sale price declined 2.64 percent, whereas the average sale price of older bungalows has declined 1.97 percent.

“There is a seasonal trend for prices to decline towards the end of December anyway, so too much shouldn’t be read into the exact amounts of decline. However, it is interesting to see that the decline of sales prices of newer two-storey homes was 25 percent greater than the decline in older bungalow prices.”

While the new rules make it tougher for all insured homebuyers to go from renting right into owning their dream home, both Mol and Hutson have great advice for those looking to get on the first rung of the property ladder.

“Be dedicated in saving up for your down payment, and make sure any payments you have are paid on time,” encourages Hutson. “Get pre-approved; then you know what your price range will be. And see a mortgage broker! We don’t work for one specific lender; we have many lenders with many different options. Not all mortgages are created equal, and with access to so many products, a broker can match you with the affordable mortgage that best suits your needs. Remember, the rules will affect everyone differently.”

“The most important first step is to find a good team to work with, which includes a good mortgage broker, Realtor, and real estate lawyer—a team you can discuss your own unique situation with, and one that is able to provide you with solid advice based on their experience and insight,” counsels Mol. “Your first home will often not be your forever home, but rather a stepping stone to that dream home.

“I have seen many mistakes made by first-time buyers who got caught up by the modern countertops and furniture in a show home, but didn’t notice some other location or layout issues that lost them money when it came time to sell. Your agent and mortgage professional can give you advice that will help you obtain a property that either has strong resale potential or could become a good investment property to hold onto long term when you make your next move. These are usually not the properties that look flashy and will first grab your attention, so there are many factors to consider that may not be obvious at first – such as considering how different layouts may appeal to different demographics of buyers or renters at different life stages.”

Rules happen for a reason, and when those reasons affect the entire housing, debt and finance market from coast to coast, measures have to be taken to protect us all – the impulse buyers as well as the diligent savers. The new rules may take some getting used to, but in the end, there are still investors, brokers and realtors waiting to make dreams of home ownership come true…it just may not be in your dream home, for now.