So, you’re planning on becoming a first-time homebuyer in 2017?
Good for you.
I hope you don’t wish you had made that choice in 2016! Yeah, there are a lot of changes to consider. Before I detail those changes, let me try and explain why they came about.
THE CURRENT HOUSING MARKET FOR A FIRST-TIME HOMEBUYER
Everyone not living under a rock understands that home prices in Toronto and Vancouver have been rising at an unparalleled pace. This has worried economists for a few years now and it has our federal government worried as well. Nobody wants to see a housing crisis in Canada. By that I mean prices getting out of control with homebuyers taking on more debt than they can manage just to buy a house.
Couple that with even a relatively minor blip in the economy where people start to lose jobs, can’t make mortgage payments and put the home on the market only to find they can’t sell it for what they paid in the first place. With too many people struggling to sell and not enough people buying, prices begin to decline rapidly and bingo – housing crisis.
That scenario may seem remote but those same economists have looked into their crystal balls and they see that as a possibility. Other economists see the problem as one of supply – simply not enough entry level housing to satisfy a robust demand. To me, that seems like a much less drastic and somewhat realistic assessment but… I’m just a lowly mortgage broker.
Anyway, the changes brought in by the Feds in late 2016 were aimed at housing prices. Make the rules tougher and you have fewer buyers right? Fewer buyers mean the demand goes down and with that so do prices. Seems sensible. The trouble is that a first-time homebuyer is probably NOT looking at million dollar homes in Toronto and Vancouver and the rule changes have disproportionately affected first timers.
CHANGES TO MORTGAGE RULES
So, what are the changes you ask?
If you are buying a home and have less than 20% to put down, you need what is called a high-ratio mortgage and the mortgage must be insured by CMHC (or Genworth or Canada Guarantee). If the mortgage is high-ratio you cannot have an amortization longer than 25 years AND you must qualify at a rate much higher than you will actually pay.
Example: as of today you could easily get a fixed rate of say 2.79% for a 5-year term for a high-ratio purchase. Despite that, you need to “qualify” as though your rate was actually 4.64%. The idea here is that if rates increase when your 5-year term is up you should be able to make the higher payment because you qualified for it at the start. Seems sensible but there are some holes in that logic – another blog required to go into all that I’m afraid!
WHAT TO DO ABOUT IT?
What that means in English is that your same income and same down-payment now qualify for approximately 15% less house. More if you factor in the 30-year amortization you could have had in 2016. Oh, and the premiums you pay for the high-ratio insurance just went up as well.
It’s certainly not the end of the world and if the changes do actually moderate prices in the long run that would be a good thing.
Time will tell.
My advice? If you are planning (or just hoping) to buy your first home you will need to prepare much more thoroughly than in the past. If you need to know what you need to know, call me. If you just want to kick it around, call me.
Basically, just call me. I’ve got time for that!