On October 17th, Ottawa’s new mortgage rules came into effect. Coming a little less than a year after the last package of new lending rules, these new policies are similar in that they specifically target Canada’s frothier markets like Toronto and Vancouver.
In 2015, the then newly-elected Liberal government tightened lending rules with a package of measures. Minimum down payments went up for houses over $500,000, fees increased for government-backed mortgages, and lenders were required to hold more capital over insured loans to curb fraud and decrease risk.
It marked some of the biggest changes in the market since 2012 - but they were mostly aimed at curbing irresponsible lender activity. Now, the newest set of changes are looking to ensure Canada’s buyers are borrowing prudently and buying wisely, too.
Canadians looking to qualify for a mortgage will have to pass a stress test, something that has been required for high-ratio mortgages previously but now applies to all new loans - even if you put down more than 20% of a down payment.
It’s supposed to ensure borrowers are able to pay their mortgages in the event of an interest jump. Buyers have to maintain the negotiated rate of their mortgage contract, but also have to prove that they could afford a rate hike. The assumed hike is the Bank of Canada’s five-year posted mortgage rate, which is currently 4.64%.
The stress test also requires that home buyers aren’t spending more than 39% of their income on home costs such as mortgage payments, electricity and gas, and property taxes.
It measures total debt service (TDS), which is the percentage of your gross annual income that goes towards payments for all debts, including car payments, mortgage payments, and even credit card debt. The stress test requires that a buyer’s TDS does not exceed 44 percent.
As of November 30th, new restrictions will be released that will govern how and when Ottawa provides insurance for low-ratio mortgages. Since the Canadian government is on the hook in the case of mass non-payments, it’s looking to reduce its financial exposure - it will only provide insurance when buyers have a credit score of 600, the purchase price is less than $1 million, the amortization period is 25 years or less, and the property will be owner-occupied.
What this aims to curtail is how much the government is on the hook for in the case of a crash. Residential mortgages worth $1 million and more is one of the market categories that’s increased dramatically in the last decade, it’s a concern if suddenly a whole whack of Canadians aren’t able to pay their mortgages.
What does this mean for investors?
It now takes more savings to buy the same property - or requires the purchase of a cheaper home.
For many Canadians, Torontonians and Vancouverites in particular, it means that homes that were potentially out of reach are now that much further. It also means that any of my clients who have purchased a pre-construction condo but haven’t secured a mortgage are wondering if they still can.
If you’re concerned about securing a mortgage and you’re pre-occupancy, dont fret. If you’ve already applied for a mortgage insurance, you’re off the hook. But for everyone else - you’ll have to prove you can handle a rate hike. If you’re worried, contact me. We can go over the numbers and make sure you’re good to go.
For those who have already invested in a condo, and if you’ve already secured a mortgage, it might mean your property value won’t increase as fast as it may have in previous years. This is Ottawa’s goal - sustainable value growth means less likelihood of a sudden drop. Not a bad trade-off.
If you’re a landlord or a renter, it actually means the opposite; since it’s now harder to secure a mortgage as a buyer in Toronto, it’s likely that rental rates will increase because more people will be renting for longer. We’re already seeing this. Toronto’s rental rates have increased significantly in the last year, and it doesn’t look like it’ll slow down.
For non-investors, you may be wondering: is now a good time to invest?
Yes and no. It really depends on what you’re looking for. Since you’re likely to be facing less competition in the condo market, it might be a great time to buy, especially as an investor. Still, it’s difficult to find single-family homes and detached houses in the city. That’s a whole other story.
Unfortunately, I can’t answer everything in a blog post. But I’m happy to meet for coffee to discuss in more detail! Please contact me if you have any questions about your pre-construction condo, future plans for investment, or mortgage questions. I’ve love to chat!