The Canadian government implemented new mortgage rules for buyers of residential real estate on October 17, 2016, in a major change which will affect "high ratio" borrowers. Buyers with less than 20% down payment are now required to qualify at a higher interest rate than the actual rate their mortgage will be at, in order to get CMHC mortgage insurance. This change, which effectively forces an "over qualification" for these home buyers, will limit the ability for many to purchase a home. Here is a recent video that we produced, plus a transcript which explains the changes:
Hello everybody. It's Randy Selzer here. Welcome back to my YouTube channel. Today we are going to talk a little bit about some recent changes that have taken place with CMHC, some recent government changes, government mandated changes that are going to effect how people can qualify for their next mortgage.
New Rules for Mortgages
In early October, without any warning, we received notice that the government was going to change the interest rate at which people paying less than 20% down would qualify for for their mortgage. This took effect with, again, with virtually no notice. Took effect on the 17th of October so it's already in place. I thought I would review this because a lot of people seem to have a lot of questions about it.
Up until now, basically, you would go to your bank and based on the income you had you would get approved at the current, what they call, the contract rate which has been roughly 2 and a half percent over the last little while. A lot of people have been getting 2.39% so, very low interest rates which helped people with less than 20% down to qualify for some of the high prices that we are seeing in the cities and Toronto area, Indeed and Vancouver, some other Canadian cities as well.
Tightening up the Real Estate Market
What the government is trying to do is here is tighten up the real estate market, to slow it down a little bit, by doing everything that they can other than raising interest rates which would be a very radical thing to do. They brought this change in and basically, in the past you would qualify at what they call the contract rate, which is the 2 and a half percent currently. What the bank is now required to do is to approve you at a higher rate which is what's called the bank of Canada rate which is currently 4.64%. It's a huge difference. Even though you are getting your mortgage at the 2.39%, you still have to qualify at the higher rate of 4.64%, so it makes it much more difficult. When you determine it's about 20% harder now to get a mortgage.
CMHC Fees Change
Let's take a look at an example using the old parameters. Let's pretend we are buying a condo at 300,000 and you are a first time buyer so you are putting 5% down which is 15,000, so your net loan is 285. The CMHC fee which is the insurance premium that you, the buyer, have to pay to insure the bank in the event of your default works up to 10,260 dollars. Your total loan amount is 295,260. Then, what the bank would do, it would calculate that 295,260 at 2.39% and they would work out that you would have to pay 1306 dollars per month to cover that. The bank also calculates further cost when they are determining how much they are going to loan you. They look at your taxes. Again, if we are pretending that we are buying a condo here, they look at the amount of taxes you'd have to pay as well as 50% of the maintenance fee that's assigned on that particular condo. Then, they add up the total expenses, basically the mortgage, the taxes and the maintenance fees and in this particular example it comes out to 1756 per month.
In order to qualify prior to October 17th, for the 300,000 dollar condo, you would need 60,000 in annual family income in order to qualify based on these numbers. Now, with the new parameters that just took effect, looking at the same condo, the same purchase, 300,000 dollar condo with the same amount down, 15,000 down. Your net loan is the same 285. The CMHC fee is the same, 10,260 and the total loan is the same, 295,260. However, now using the new parameters, they have to qualify you at the bank of Canada rate which is currently 4.64% and that drives the month cost of a mortgage loan up to 1657. It's quite a bit higher than it was before.
Then they factor in, again, the taxes on the unit, half your maintenance fee, your total expenses now come to 2107. Again, considerably more than they were before. Using the new parameters, you now need 72,000 in annual income to qualify, where as in the past you only needed 60,000 to qualify to purchase this condo. It's exactly a 20% difference. Conversely, with the same amount of income, you can only buy something worth 20% less than the 300 that you could afford previously.
Effect on Buyers
What does this all mean? Well, for anybody paying with more than 20% down, if you are buying your second home for example, you're upsizing. Typically you have more than 20% at this point, you build up some equity so it's not going to effect you. Also, people are always talking about foreign buyers coming in and bidding up the price of houses. Most foreign buyers that come in have money and they are not buying property with 5% down, they are buying about 20% or 50% or sometimes 100% cash where they've got the money to just buy the house. It's not really effecting those people either. It's mostly effecting the first time buyer.
However, it's done. It's taken place. It's taken effect on the 17th and it is already in effect so there's nothing you can do about it at this point. There are a couple of other changes that are going to come into effect.
There's some other internal changes behind the scenes where there's some internal insurance issues between banks that are going to be taking effect on November 30th which also makes it a little tighter in the market and also, the Canadian government is going to require all people now to disclose when they sell their primary residence. Even though there is no tax payable, probably the only thing in Canada where you don't have to pay tax, when you sell your home which is your primary residence, you are now going to be required to disclose that on your income tax form. I believe this is just sort of a first step where they are going to try to crack down on people who are flipping houses and calling each one their primary residence even though they only lived there for a few months. They renovate it then they flip it. I think that's one of the things they are trying to do or perhaps even with foreign buyers who are doing the same thing.
What does this all mean? Well, these are just changes. Again, the government, they are looking to slow down the market and the market has been over heated. There's no question. This spring, summer, and fall has just been a crazy - a wild west time, certainly in the Toronto area where prices are way up from where they were last year. I can see what they're doing. I don't know if it's going to be that effective the way they are doing it but it's in effect now.
Hope you enjoyed this. There's much more information on my website at randyselzer.com. If you are viewing this on any social media, whether it's Facebook or Twitter or wherever, I welcome your comments. Have a great day and we'll talk again soon. Bye now.