It’s election day here in Canada and sometime late this evening we’ll know if the Trudeau Liberals will stay in power or if Erin O’Toole’s Conservatives have received the majority of the vote and will form a new government. All the major political parties have included housing affordability in their platforms, but no matter which one forms or continues government finding workable ways to make housing more affordable for Canadians is going to be a steep challenge.
The people who are most disadvantaged in the Canadian housing market as it is these days are first-time homebuyers. That is to be expected, and there’s not much explaining that needs to be required when ever-rising median home prices come with ever-greater amounts needed for down payments as well as a greater chance that prospective buyers won’t qualify for the mortgages they’d need. As a realtor working in Canada that means that some people who might otherwise be your clients stay as renters instead.
Less pie to go around, but our online real estate lead generations service here at Real Estate Leads is an excellent resource to help realtors who might be struggling to generate new clients. What it does is give them an inside track to being first in touch with people who have been identified as genuinely ready to make a move in the real estate market.
Highly recommended, but let’s today look at a part of the Conservative government platform that might actually be quite effective in addressing housing affordability in Canada.
Fixed Across 7 /10
Part of what the Conservative Party is pledging is to create a new market for fixed mortgages in the seven- to 10-year range, with an idea to promote better housing affordability. Industry experts tend to think that there is real merit in it, and that it would provide stability both for first-time home buyers and lenders. The belief is that it would be another path to homeownership for Canadians, and that it will also reduce the need for mortgage stress tests- another major stumbling block for 1st time homebuyers that can derail the home purchasing plans all too quickly.
The party also has an intention to amend the mortgage stress test so that it no longer discriminates against those who aren’t the typical ‘qualified buyer’ – small business owners, contractors and other non-permanent employees like casual workers. The ideas is that these types of revised terms would force different mortgage lenders to offer more competitive rates. Better rates would mean many would-be buyers that might be locked out because of a lack of this type of competition might still be able to purchase a first home.
It is also believed that fixing a mortgage rate for seven to 10 years would eliminate the need for a stress test when owners have the freedom to choose not to refinance for prolonged periods of time, and that this would work out to much more in the way of affordability for buyers. It would also help to slow the massively expanded levels of mortgage debt in Canada – $1.98 trillion in May of this year.
Helpful Restrictions
Let’s say a household with in the vicinity of $125,000 as their total annual income qualifies for a mortgage with a 15-20% down payment at 2.44%. Currently and because of the stress test they would be restricted to about $600,000 purchasing power with a monthly payment of just under $2700 or so. This would work out to about 33% of the total debt service (TDS) ratio. This new plan works on the belief that that households with that type of net income should be able to afford a mortgage of up to $800,000 with related monthly payments in the vicinity of $3,500 or so.
The additional $200,000 in borrowing power would go a long way towards affording homes these types of people would want / need in major urban areas of the country where house values are high and will continue to be that way. Higher monthly payments would be more comfortable if secured over 5, 7, or even 10 years. Keep in mind that in the USA 10-25-year terms are quite normal.
By creating incentives to keep their mortgages intact homeowners would benefit from greater affordability, and this is really something to consider.
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