With Toronto and Vancouver home prices soaring to unprecedented heights amid years of historically low interest rates, regulators have stepped in to introduce new mortgage rules aimed at tightening up the market. Industry officials estimate that roughly 1 in 12 new home purchases could be impacted. Here are some examples of how these changes could affect you in our local London home buying market:
The first change affects the rate used to qualify borrowers. As of Oct. 17th, buyers getting a 5-year fixed mortgage will have to qualify based on the Bank of Canada’s posted rate, currently 4.64% (2.25% over the actual average rate available today and the rate you would actually be paying).
The Math: this means that for someone with a 10% downpayment, $50,000 annual income and minimal debt who could pre-qualify for a $300,000 home at today’s offered mortgage rate, the pre-qualification amount drops to $246,000, an 18% decrease once this new rule takes effect in two weeks.
The second way this change could affect you is when it comes to refinancing. Homeowners trying to consolidate as much debt as possible into their mortgage will need more income to get approved for the same loan amount or the higher qualification rate will push their debt ratios over lender limits.
Effective Nov. 30th, lenders will no longer be allowed to insure the following:
- amortizations above 25 years
- rental properties not owner-occupied
- mortgages over $1-million
While banks don’t actually need this insurance, lenders who sell mortgages to investors do. Lenders and mortgage brokers that formerly undercut banks, saving billions in interest every year, are now at a disadvantage opening the door for banks to increase rates.
The Big Picture
If mortgage rates were increased by just 1% that would result in a 9% decrease in affordability and would slow the market alleviating some of the mounting pressure. But since the current state of the economy doesn’t justify raising rates, either at the Bank of Canada level or the bond market, policy-makers are left scrambling to look for alternative ways to effectively raise mortgage rates without increasing other economically volatile rates. This combination of increased capital requirement, securitization limits, default insurance restrictions and “lender-risk sharing” on insured mortgages will only increase expenses for lenders which will then be passed on to borrowers through higher rates. Industry insiders predict that at this time next year policy-makers could push mortgage rates more than 0.5%.