What do all these mortgage rules mean to me?
New mortgage rules and what do they mean to us?
In the real estate world, mortgages are usually ways of buying a house. It is key to whether a family is going to enjoy their life in a new and cozy place of their own or not. Therefore, many clients and real estate agents consistently follow the information about new government mortgage rules. This way it is easier for them to react and make as lucrative a deal as possible. Here we cover recent mortgage regulations introduced by the government of Canada.
Life before new mortgage rules
Mortgage rules have existed for a long time and proved the concept to be working well in our real estate industry. Thanks to various mortgage opportunities, many families managed to acquire their new homes. Once they decided to put their efforts into motion, the dream was finally achieved. Previously, to most families, the word “mortgage” was a lifesaver on the way to home ownership. However, times have changed. Up till now the mortgage rules were realistic which allowed more people to qualify. In the end, everyone was appeased – real estate agents because they sold the property. The buyer, because now they are a legal owner of the property. Finally, the government, as they received the fees and increased the economic growth.
The old mortgage rules worked very well
Let’s say an average family of millennials could put 20 percent down payment and receive low-ratio financing. Still, they had the option through the government that offered as low as 5% down, insured mortgages. There is another benefit that the old mortgage rules provided to society. An average first-time home buyer could have been granted a considerably larger mortgage. In fact, with a $50,000 income and a 5% down payment, they would have qualified for around a $300,000 purchase.
The era, “after new mortgage rules”
While under new regulations, it is more difficult to receive a mortgage and become a homeowner. The entire real estate market is affected by the new rules as up to 50% of Canadians now will not qualify for a mortgage. According to the federal Liberal’s new rules, the amount of the down payment will no longer matter. To make it clear, it does not change anything if you want to put a 5% or 20% down payment, you will be obligatory subjected to a “Stress Test.” Only this scrutinized calculation process will decide what amount of mortgage for which you are eligible. By the way, the stress test went into effect on the 17th of October, 2016.
At the same time, the basis of the stress test is aimed to measure if the buyer can afford to repay the mortgage at a higher rate. This, in case the mortgage rates rise to the current bank, “posted” five-year mortgage rates set by the Bank of Canada. The problem is that the “Posted” rates offered by the banks are unrealistic because it is much higher than what lenders are actually offering. The entire buying process becomes more difficult & expensive as a result. To qualify, you will now be quoted on a five-year fixed rate of 4.64%, while realistically, lenders offer you 2.44%. Absolutely ridiculous industry experts say!
More mortgage rules coming November 30, 2016
Also, it is important to pinpoint that as of November 30th, 2016, new criteria for low-ratio mortgages will also take effect. Apart from that, you should know that the maximum amortization period of your mortgage must be 25 years or less. (The new rules theoretically force buyers to qualify on an 18-year amortization rather than an actual 25-year.) At the same time, the maximum purchase price must be less than $1 million. As for your credit history, there are restrictions such as your beacon score must be 600 or higher. Finally, the property has to be owner-occupied.
Government’s viewpoint on its recent mortgage modifications
As Ottawa has recently decided to tighten mortgage requirements, it has become much more difficult for people all over the country to obtain a mortgage. This point is more relevant to the millennials who are the driving force of the market. They make up the volume of transactions. The Liberal’s reasoning for such drastic changes in mortgage rules is the federal government’s predictions. There may be an increased number of mortgage defaults in the future if rates were to rise. All this “could” happen due to the healthy activity in housing markets all over the country, providing rates do start to go up. To summarize, the government is of the opinion that new restrictions will decrease the number of predicted mortgage defaults to banks and other lenders. They “must” protect the wealthy banks who essentially control our government and our economy!
Consequences for the real estate market
Every single government incentive and rule has its purpose. However, the idea is not always as dangerous as its consequences. Because of these new regulations, there will be a massive increase in first-time buyers who now cannot afford to buy a home. Likewise, the people who expected to upscale can now only afford something much cheaper. This does not meet their personal wishes and expectations, thus a stalling housing market. Industry experts say that as a result of new mortgage rules, the market can soon expect even higher mortgage rates. We find that kind of ironic.
What the industry experts see
The majority of real estate experts agree that this government initiative will lead to an even bigger failure than the one it was trying to avoid. Also, experts say that it would have been imperative for Ottawa to have consulted professionals from the inside. This way, many problems we will now be facing, would have been avoided. The new mortgage regulations will also become the road for the banks to take further control of refinances, rentals etc. Previously the responsibility was with brokers and lenders not related to “The Big Five” lenders. As a result, the competition will become tougher and the public will drastically suffer financially. Again, experts agree that the government was trying to cope with a mythical problem which did not exist. The rate of default mortgages in Canada for the last several years has been extremely low.
Is there a light at the end of a mortgage tunnel?
In fact, no one can predict for sure what is going to happen. Clients now are wondering if it is better to just wait to do any real estate transactions at all. One can only hope that this detrimental mistake will not kill our industry as we know it. We hope the real estate market will stabilize and everything will get back to normal, but highly improbable. The best tip that can help you through this fiasco – hire a knowledgeable and trusted real estate agent. This person will become your guide in the real estate/mortgage world and do their best to offer you the options that help you succeed.
Without a doubt, I know this “Stress Test” is simply one step closer to government control over Canadians. Ideally, our government should be conducting their own “Stress Test” on their handling of our tax monies. Also, the Liberals should be monitoring and controlling the 5 major banks, which are basically in control of our government. You can easily take away the opportunity of home ownership by manipulating the rules so citizens can’t qualify. You now force them into rentals, becoming dependent and vulnerable. Very soon, a nation forced into rentals will be at the mercy of government, landlords, and institutions. Their unregulated operations will well surpass any “damage” a mortgage rate change would have had. If our infamous Liberal leaders were “truly” concerned for the welfare of the people, they would put the restrictions on the five major banks, not the public.
One reasonable option would have been to state that buyers had to commit to a locked 10-year term, on the lender's competitive discount rate. This option would confirm their payments were guaranteed for a decade, regardless of rate changes. Another choice would have been to extend the amortization from 25 years to 30 or 35 years instead of effectively setting it at 18 years for qualifying purposes. Statistics Canada shows Canadians typically move every five years on average. Therefore, an extended amortization is entirely appropriate, as the majority of homeowners don’t plan on staying for the long haul, to pay off their first mortgage. This extended amortization is critical for home ownership qualifying purposes, and affordable payments.