How much house can your client afford? It looks like less under new rules unveiled earlier this week by the federal Liberal government.
On Oct. 17, all insured new homebuyers must “stress test” their ability to carry their mortgage payments. This is based on whichever is greater: the negotiated rate in their mortgage contract -or- the Bank of Canada’s five-year fixed rate.
Currently BoC’s posted rate is about 4.6% – about two points greater than many discounted rates.
The purpose of mortgage insurance is to protect lenders in the event of default. As mortgage insurance is required when homebuyers make a down payment of less than 20% of the home’s purchase price.
The expanded “stress tests” will aim to ensure that home buyers could still afford their mortgage payments if interest rates climb higher.
RateHub.ca, an online personal-finance resource, published calculations as to what buyers at 3 different income levels should be now able to afford under the new and outgoing rules.
For each scenario, certain assumptions have been made:
* Each buyer has saved $40,000 for the down payment.
* Under the outgoing rules, calculations are based on a five-year fixed mortgage rate of 2.17 per cent amortized over 25 years
* Under the new rules, calculations are based on a five-year fixed mortgage rate of 4.6% (the Bank of Canada’s posted rate) amortized over 25 years
* Monthly property taxes of $400 and monthly heating costs of $200
Scenario No. 1
Annual household income (pretax): $50,000
The maximum purchase price this buyer can qualify for:
· Outgoing rules: $277,434
· New rules: $222,617
Scenario No. 2
Annual household income (pretax): $100,000
The maximum purchase price this buyer can qualify for:
· Outgoing rules: $650,000
· New rules: $512,133
Under the soon-to-expire rules, this buyer’s maximum purchase price is dictated by the minimum down payment that’s required.
Federal rules stipulate that home buyers must put down at least five per cent on the first $500,000 of the home’s purchase price and 10 per cent on the remaining balance. (Homes priced at $1-million and up require a 20-per-cent down payment.)
Thus, with $40,000 saved up, under the current rules, this buyer can put down the minimum on a $650,000 home, and earns enough to afford the subsequent mortgage payments and other housing costs.
But when asked to qualify at a steeper mortgage rate, this buyer’s spending power is diminished by nearly $140,000.
Scenario No. 3
Annual household income (pretax): $150,000
The maximum purchase price this buyer can qualify for:
· Outgoing rules: $650,000
· New rules: $650,000
In this scenario, the buyer is not affected by the new rules. What the buyer can afford is limited by down-payment rules, rather than the debt-to-service ratio.
Instead, let’s assume the buyer has $80,000 for the down payment.
The maximum purchase price this buyer can qualify for:
· Outgoing rules: $999,999
· New rules: $841,649
Notes: These calculations do not take monthly condo fees into account, which would reduce affordability. Nor do they account for other debt obligations that home buyers may have.
Mortgage changes to impact investors
There are now fewer options for rental properties.
In the wake of new mortgage rules, some mortgage lenders are pulling mortgage programs for rentals.
One of the first was Merix/Lendwise, which announced a change to its offering Tuesday – a day after recent housing rules were put into place.
In a note to brokers, the lender said it would no longer be accepting rental applications.
First National, another major lender, has made similar changes to its offering.
“(First National) have temporarily suspended their conventional rental program and their Alt-A program, which is part of the business for self-program,” Ernie Stapleton, a representative for First National, told CREW. “As the dust settles, I think First National will re-evaluate their programs in the context of the new rules to see what can be offered.”
And it isn’t just rental properties that are being impacted.
Another lender, MCAP, will soon charge a 15 basis point surcharge for all new refinances beginning November 30, 2016.
These sorts of lender updates are the result of the government’s recent changes to low-ratio mortgage insurance requirements.
Effective November 30, all mortgages originated by lenders who use portfolio insurance – which includes all monoline lenders – must meet the following criteria:
· Maximum amortization of 25 years
· Maximum property price below $1 million
· A property must be owner occupied
The full scope of the changes can be viewed online here.
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