So the mortgage rules changed...what does that mean?
That's a really important question to ask, especially if you are looking to buy or sell in the relatively near future.
In order to properly answer, it's important to break things down into two different categories as there will be short and long term effects to these changes.
(1) How does it effect specific individuals?
(2) How could it effect the market overall?
Before we get started I just want to push pause on the panic button. We have seen widespread backlash about these changes, and while they might flat out suck for those who will we able to afford less come January 1st 2018, the rules are what they are. We will adjust to them as they simply become the new norm, and that's exactly what they'll be. If you are thinking of sitting on the fence and hoping for some reversal of policy over the next little while, don't count on it. When these types of federal regulatory changes come into play, they stick...for a long time.
The other advantage to all of this is that the government is forcing you to live more within your means, which isn't a bad thing. Use the extra money to pay down your mortgage faster, and then upgrade your property in a few years. While these changes may have a significant impact on supply and demand over the long term, they also make our real estate market more stable with people living in homes they can actually afford if the market doesn not continue to grow at 10% per year.
So having said all of that...let's see just what these mortgage changes are all about.
How will the changes effect individuals?
This one is pretty easy...essentially just take what you could afford before and reduce it by 20%. Why, you ask?
If you are familiar with the previous mortgage rules, anyone who put down less than 20% for their downpayment had to qualify at a higher mortgage rate. Now that doesn't mean that they couldn't actually get a much lower rate, just that they would have to be put through a test to see if they could qualify if the rates were to increase.
Now as I mentioned above, this "stress test" was only in place for those people who put less than 20% down for their deposit....WAS. The new rules now require that everyone who is looking to get a mortgage, regardless of downpayment, be put through a stress test. The qualification rate is whatever the current Bank of Canada's posted rate is at the time you go to get your mortgage (currently 4.89% vs the 3.1% fixed rate mortgage you could actually get). This is what we call a "stress test".
A stress test is a protection to ensure that if rates go up that you can still afford your mortgage/monthly payments. The challenge that people have made to implementing a stress over the years has been that property prices have risen so much that if interest rates were to rise a homeowner could always just pull the money they had built into their property in order to cover any issues. Well the government felt like it was time to stop assuming that the marketing was going to increase at 10%+ every year (which it very well may), and so that have put these protections in place the ensure people don't have to rely upon that.
This policy has to be in place by January 1st 2018, however many mortgage lending institutions/banks will start the changes even sooner.
Now that you understand what the changes are, let's look at an example of what they might look like in the real world.
Let's say you walked into a bank last week and they qualified you for a $500,000 mortgage based on a five year fixed rate of 3.25%. That would equal a mortgage payment of $2167.00 per month. Essentially the banks are telling you that this is as high of a monthly payment as they are willing to lend you.
Skip forward to today, and while you can still get that 3.25%, and still pay that $2167.00 per month, the bank is now going to put you through their stress test. You now have to qualify at the higher of...1) the current posted rate (4.89%) or 2) a rate that is 2% above the mortgage that you are actually getting (in this case 5.25%). So in this scenario, the higher of the two rates is 5.25%.
What that means, is that your $2167.00 monthly payment limit will now only get you a $395,000 mortgage. That's just over 20% less than you would have been previously qualified for.
Again, it is what it is...we all have to play by the same rules. Your only way around this is to purchase something now before the rules come into effect.
How will the changes effect the market?
The reality is only time will tell. What we feel very strongly about is that this will increase demand significantly for properties in the $600,000 - $1 million dollar range, where the majority of properties are condos. Two bedroom condos across the city are already in increasingly high demand, and we expect this to only increase that demand moving forward. We fully expect the condo market to have an excellent run in 2018.
So...what do we think about houses and more expensive condos? Again, we don't see the upper end condo market suffering a great deal because they are already a more niche product than houses anyways. Million dollar + condos typically don't see the bidding wars that houses have seen the past few years and instead they sit on the market waiting for a buyer with the right fit.
Houses get a little bit more complicated. These changes are certainly going to impact people who are looking in the $1 - $2 million dollar range the most, and demand in these price ranges is certainly going to be less than it has been over the past 12 or 24 months. We can see that doing 1 of 2 things to the market. The first is that there is less demand and we see house prices stay flat. The second is that the sellers of these houses simply stay put and we see less and less housing inventory moving forward.
We hear it every day, and some people roll their eyes, but Toronto is a truly world class city. We rank in the top 1 - 5 for pretty much everything from tech to financing and all the other good stuff in between. People want to move here, businesses want to grow here (Google's just announced it's first smart city in Toronto). This is just something we need adjust to as individuals, but the market overall is going to be just fine. The government has thrown a lot at the real estate market this year and while things have certainly calmed down, we are by no means in a struggling market and we don't see that being the case anytime in the near future.
If you would like to find a property before these rules take effect, we are your team. Our incredible buying agents, mortgage team and lawyers are all amongst the best in their fields. All you have to do is reach out and ask for our help (or sign up for property updates through the link below.
Hope this was helpful!
Blair Johnson, President