Well, we knew this was coming. Somewhat. After a lot of deliberation over the spring and summer, the Office of the Superintendant of Financial Institutions has come out with new regulations that will make it harder to qualify for mortgages once again. There are a few changes, most which are minor, but one major change that will impact about a large number of borrowers in Canada. These changes will be coming into effect Jan 1, 2018.
- For conventional mortgages (20% or more down payment or equity) the qualification rate for all terms is now either the Mortgage Qualifying Rate (MQR, currently 4.99%) or 2% higher than the rate, whichever is higher.
- Lenders are to enhance their Loan-to-Value ratios (the percentage of the home value you can obtain financing for) so they are reflective of the local housing market. For example, smaller communities may find they have more limited options as these are considered higher risk.
- Lenders will be restricted from offering combination mortgages (1st and 2nd combinations) to circumvent guidelines. Some lenders for instance would offer a 1st mortgage to 75% or 80% and a 2nd to 85% which allows them to qualify the 1st mortgage using their own looser guidelines instead of tighter insurer guidelines.
How do these rules affect you?
The most important of these is of course the reduction in borrowing power with 20%+ down. With the new rules, buyers will find their borrowing power stripped by about 20%. In Vancouver, where home values often exceed $1mil, this could reduce borrowing power by $200,000 or more! Although there has yet to be official word on whether contracts written prior to Jan 1, 2018 will be grandathered under the old rules, we expect they will follow previous protocol and those with existing contracts will still be able to qualify under the old rules.
Also, interestingly, Credit Unions are provincially regulated and are not affected by these changes. We have been doing a lot of business with Credit Unions since 2012, when the mortgage changes really started coming fast and furious. As of right now, the Credit Unions will still be able to qualify you after Jan 1st under current guidelines. But it is important to note that once the Credit Unions get flooded with a ton of business that the banks can’t do anymore, they are likely to scale things back to balance their books like they have in the past. They may do this by either changing/reducing policy or by surcharging certain products (like 35 year amortizations for instance).
What do you need to do NOW?
- If you have a pre-sale that completes later than Dec 31,2017, we NEED TO TALK! We want to make sure you are grandfathered as you may not be if you do not have an application in before the new rules come into effect. We may also be able to secure a long term rate hold for you.
- If you need to access your home equity for any reason in the next few years, you should consider refinancing now. You may want cash for a number of reasons:
- Access to capital for future investing in real estate or other investments
- Early inheritance for your children to purchase their own residence
- Self employed borrowers looking to increase liquidity
- If your renewal is coming up soon
- If you are planning on purchasing something soon with 20%+ down. You should get pre-approved now and start shopping unless you have a lot of breathing room between what you qualify for and what you plan on buying.
Well, the government is at it again. But what they are trying to do is slow the housing marketing without having to use interest rates as a tool, as raising rates would negatively impact many other things, particularly commodity exports.
The key to remember here is that although it is making it harder to OBTAIN the asset, these rules are being put in place to PROTECT your asset value from a meltdown like what happened down in the US. The more qualified buyers are, the lower the chances of a real estate crash.
Call us today to learn more about how these rules affect you and create a plan of action. Time is low, so it’s important you take action today. 604-229-5515, Kyle@GreenMortgageTeam.ca.