If you’re in the market for your first home or your next home, you may have already created a list of ‘must-haves’ and ‘nice-to-haves’ to guide your search for the house ideal for you and your family. At the same time, you’ll want to get a pre-approved mortgage before you start house hunting.
Getting pre-approved is always advisable, but especially now, as new mortgage rules come into effect on January 1st that will require all home buyers to pass a ‘stress test’ that’s designed to help ensure your mortgage remains affordable should interest rates rise.
The Office of the Superintendent of Financial Institutions Canada announced the new rules in mid-October. Previously, only insured borrowers had to undergo such a test. Some industry insiders predict there may be a surge in home sales as homebuyers rush to quality for mortgages before the new rules come into effect.
The latest change follows new mortgage rules that were introduced over the past year to temper the country’s heated real estate market. Here’s a refresher on those rules:
DOWN PAYMENTS. Home buyers must put at least a down payment of 10% on the portion of the price of a home over $500,000. For anyone buying a home for $700,000, for example, the minimum down payment will rise to $45,000 from $35,000. Homes that cost more than $1 million still require a 20% down payment and any home under $500,000 still requires a down payment of just 5%.
That’s welcome news for those looking to buy in Durham Region. According to the Durham Region Real Estate Association, the average selling price here was $575,602 in October 2017, a slight decrease from the $578,666 average selling price the previous month.
Clarington is even more affordable: the average selling price in October was $524,640. The average price of a detached home was $572,348, the average price of a semi-detached home was $408,044, and the average price of a condominium or townhouse was $334,225.
STRESS TEST. A stress test that previously applied only to borrowers who chose variable rate mortgages or fixed rate mortgages with terms of less than 5 years was extended to include all ‘high-ratio buyers,’ which is defined as buyers with less than a 20% down payment.
The test measures whether a borrower could still afford to make payments if mortgage rates rose to the Bank of Canada’s posted 5-year fixed mortgage, which is typically about 2 percentage points higher than the discounted mortgage rates offered by most lenders. The stress test set a ceiling of no more than 39% of household income being necessary to cover home-carrying costs, such as mortgage payments, heat and taxes.
Some compare it to preparing for a rainy day. Consider this scenario: You buy a home for $472,247, put down 20% and get a five-year fixed-rate mortgage of 2.84%, and have a monthly mortgage payment of $1,757. But if your mortgage rate rises to 4.84% after your five-year term ends, your monthly payment would rise to $2,163. Can you afford the increase?
MORTGAGE INSURANCE. All homebuyers seeking an insured mortgage – regardless of how much they have for a down payment – are subject to a mortgage rate stress test. Before the changes came into effect, only those with less than a 20% down payment were required to pass a stress test and have mortgage insurance backed by the federal government through the Canada Mortgage and Housing Corporation.
Buyers with more than a 20% down payment opting for mortgage insurance could obtain low-ratio insurance sold through two private insurers, but backed by the federal government, subject to a 10% deductible. To quality for low-ratio insurance that took effect in late 2016, the mortgage’s amortization period must be 25 years or less, the purchase price must be less than $1 million, the property must be owner-occupied, and the buyer must have a credit score of 600 or more.
CLOSING PRINCIPLE RESIDENCE LOOPHOLE. Also under the new rules, all home sales must be reported to the Canada Revenue Agency. The gains from sales of primary residences will remain tax-free but the government is aiming to block foreign buyers from purchasing and flipping homes while falsely claiming the primary residence exemption from capital gains tax.
TO LEARN MORE: Visit the Government of Canada Department of Finance website at https://www.fin.gc.ca/n16/data/16-117_2-eng.asp.
Many people were concerned the new mortgage rules would negatively hurt home buyers and especially first-time home buyers. But as the average selling price mentioned above illustrates, ours remains an affordable community where buyers can still find plenty of choice with a down payment of just 5%.
Whether you’re interested in buying or selling, please know I am committed to looking out for your best interests and will be there for you every step, taking care of detail. I look forward to helping you find your first or next home!