Mortgage Rule Changes: What is the Impact for Buyers and Sellers?
Last week the Federal Government of Canada announced a number of rule changes to how buyers can qualify for a new mortgage.
If you have never applied for a mortgage before then there are some things you should know prior to reading how these changes will affect your ability to make a purchase.
Right now (before October 17th) the interest rate that you would be pre-approved by the lender is typically their best rates, these are the ones you see advertised: “5 year Fixed Rate at 2.29%” is how the ad might look.
These are the rates that the lenders use to be competitive with each other, they also have their ‘posted’ rates, which become more relevant down below.
As a buyer with a down payment that is less than 20%, you are subject to paying a mortgage insurance premium to the mortgage insurer. There are three mortgage insurer’s in Canada, you have probably heard of CMHC (they are the biggest one and government backed), Genworth and the smaller of the 3, Canada Guarantee.
How the Mortgage Rules Have Changed
After October 17th, if you have less than a 20% down payment, you will no longer be able to qualify for a mortgage at the lender’s best rates.
Let me say that again…After the 17th of October you will not longer be able to get a preapproval based on the lender’s best rate of say 2.29%.
In order to secure a pre-approval you will have to be qualified at the Bank of Canada Rate which is (as of publication of this blog post), 4.64%, this interest rate is an average of the 6 Big banks posted rates.
That is a massive jump, a full 2% above what the lenders best rates are.
Here is How These Changes will Affect Both Buyers and Sellers
We have talked a lot about how buyers will be impacted with these rule changes and you will see a real world example below that will best describe the impact, however, I’d like to also mention how this is going to affect sellers and current home owners.
If you are a home owner with a mortgage that is coming up for renewal and you have equity that you want to pull out to do renovations, or purchase a vacation property, or pay off other debt, after October 17th, you will also be subject to the same rule changes. You will also have to qualify at the Bank of Canada posted rate and not your lenders best rates.
If you are just looking to renew your mortgage, and let’s say you are less than impressed with the service you are getting from your current lender and want to shop around instead of renewing at their rates, you will also be subject to qualifying at the new rates.
The government has just made it harder for you as a consumer to shop around for the lender that is not only going to give you the best rate but also the best service.
Real World Example
Here is a real world example of how your purchasing power will change (keep in mind these are raw numbers with no debt, no taxes, no heating costs or condo fees factored in):
Prior to October 17th:
- Annual Household Income: $80,000
- Debt: $0
- Credit Score: Good
- Interest Rate: 2.39%
- Amortization Amount: 25 Years
- Approval Amount: $482,052
After October 17th your approval amount drops to $380,043 based on the interest rate of 4.64%. That is a difference of just over $100,000.
THIS is how this will affect you, as a buyer in the Calgary market this may take you to a completely different quadrant or neighbourhood or to a different style of home that you may have started looking for originally.
Ultimately, this is the new reality. There is no getting around these rule changes, this is what we have to deal with now come October 17th.
If you’d like more information and would like to speak with one of our Mortgage Experts at MortgageLine call: 403-407-1902 or you can simply click here.