If you’re seeing all the Instagram, Twitter, Facebook and article posts that I am, you’re probably wondering – ‘With the new mortgage rules coming Jan. 1st will the Canadian real estate market drop?’
It’s an easy thought to creep in considering the number being tossed around a lot is that under the new B-20 stress test coming a homebuyer who could afford $600,000 now will only be able to afford $480,000 after January 1st. That’s about a 20% loss in buying power which would mean a drop in house prices.
The problem with that calculation is that it makes several assumptions, the first being that the mortgage industry will sit back and shrug off a 20% drop. The second assumption is that home buyers will be applying for mortgage the same way they have in the past.
Let’s look at the first assumption. The mortgage industry is looking at a potential drop of 20% in mortgage volume – a combination in the number of mortgage they do and the mortgage amounts clients can afford.
Knowing this change was coming I’ve spent the last few months working with lenders to ensure they have solutions available for my clients for after January. I’m already seeing mortgage lenders making small and quiet adjustments to ensure they can meet the changes.
For example – adjusting their debt coverage. Lenders generally want borrowers to use no more than 42% of their income to service their debts (mortgage, car loans, credit cards, student loans, child support etc). Some lenders are looking at increasing that amount to 46 and as high as 48%.
By increasing how much of a borrower’s income can go to debt, lenders are able to balance some loss of affordability by the new stress test.
good mortgage brokers are going to need to work a little harder to find ways to ensure their clients can afford the house that suits their wants and needs.
Another example – loosening their restrictions on income types. Many lenders want to see clients with steady salary income and have tight limits on what sort of additional income they’ll include in a borrower’s affordability. With the new stress test changes, lenders are likely going to loosen their restrictions on things like: tips, child tax benefits, occasional income from things like Uber, AirBnb etc.
This also likely means that lenders will need to keep rates relatively lower to avoid pricing themselves out of business. We were beginning to see interest rates move back towards pre-2009 levels, however with the new mortgage rules lenders will need to keep them close to where they’re at for the time being.
At the same time, good mortgage brokers are going to need to work a little harder to find ways to ensure their clients can afford the house that suits their wants and needs. Reducing student loan payments, using some down payments funds to pay out leases or debts, for example can add tens of thousands of dollars to the amount a client qualifies for.
In the second assumption, we’re going to begin seeing changes in the way clients buy houses.
We’re already beginning to see a trend emerging where more parents and grandparents co-sign mortgages to help the younger generation get into a home with increasing home prices.
That’s a trend we’re likely to see increase as families come together to help each other qualify for a mortgage. That will include both moving in together to cover and simply co-signing on the mortgage. In the past this began to emerge when the prices and bidding wars got out of hand, moving forward with the new mortgage rules it will be a solution to deal with the stress test.
It’s important to remember that the purpose of the government imposed new mortgage rules is to try and ensure homeowners don’t over extend themselves and buy a house that they won’t be able to afford in 5 years when the interest rates are higher.
Homeowners and buyers should understand that the change isn’t going to chop 20% of the value off their houses. The market will adjust to the changes and will fall into a more predictable pattern and we’re likely going to see the end of 18-20% yearly appreciation in hot markets.
So don’t panic – the key to getting the home and mortgage you want is to work with a professional mortgage broker who understands all your options, can safely navigate the new rule changes and has access to the best lenders and their best mortgage programs.