Government Changes and What They Mean

On October 3rd the federal government announced a series of regulations that govern the access and limitations of mortgages requiring insurance. The rules were put in place as a measure to add increase “stress testing” and with the intent of controlling future risk in the event of future rate increases.

At first glance – the average consumer would see the immediate effect of these changes. Namely, to avoid future risk, for buyers with a small down payment, the Banks would now be required to qualify the borrower on the Bank of Canada rate (currently 4.64%) vs current rates (roughly 2.69%). This directly translates to a 20-25% decrease in purchasing power. In other words – if you were previously approved for a mortgage of $650K, under the new guidelines, you’ll probably only qualify for a mortgage of $500K.

Straightforward, right?

Well nothing with the government and regulations is ever linear in its purpose. And I believe that here too, we will see far reaching, and perhaps unintended impacts. Allow me to illustrate some examples:

Home purchasers

Well, as stated above, those with less than a 20% down payment will see a definite impact. Often these are first time homebuyers. Their purchasing power will be reduced – and may cause them to rethink their home wish list – and this has definitely had an impact on purchasing trends. People looking for bungalows – have now shifted their focus to townhouses and 2 bedroom condos. Also – the more stringent qualification requirements for their financing (vs. those with more capital) may create an uneven playing field when it comes to the notorious bidding wars in our city.

First Time Home Buyers

Further to what I’ve stated above, first time homebuyers (with no current market real estate assets) may find that the new qualification requirements have pushed their purchasing power outside of the hot housing market. Such consumers may have to re-think home ownership and long term renting prospects.

Parents

In recent years the term “the bank of mom and dad” has arisen. Even more so – parents who own debt free properties, or have retirement savings – may feel compelled to help their first time homebuyer children if they have any chance of entering the housing market. While the baby boomer generation planned to pay for university educations, and was well warned of saving for retirement, the need “to help your kid buy a house” is a new financial concept for this generation – one that they may not have planned for.

Investors

The reality is that some financially healthy people with good jobs and credit histories may not be able to purchase a home (with rising prices and tightening mortgages qualification criteria). I believe that this creates a pool of “good quality” renters. Renters that want to live in a nice place, in the location of their choice, and can afford to pay rent, but not necessarily a mortgage. For people who already have equity built in the housing market – this may present the opportunity to invest in real estate.

For everyone looking for a mortgage

One of the things that is not as straight forward in the regulatory changes is the impact to the pricing and funding of mortgages. The impact to consumers is that going forward – the mortgage rate you receive will be based on a matrix of your needs and mortgage qualification parameters. You can no longer look at a rate posted in a branch or on a website and try to compare apples to apples.

Do I think these government changes are good?

Well, while I have always admired the Canadian financial regulatory system for its prudency – I think that any regulations put in place to only address future risk without also addressing home ownership accessibility cannot be good in the long run. Home ownership and pride in ownership are the cornerstone of pride in community. And pride in your community builds better cities and towns for us all.

And my final point – whether you agree with the changes or not – I think I can safely conclude that the mortgage financing world is a more complicated place post October 2016. So as always, if you’re looking to buy, help your kid buy a place, purchase an investment property, refinance, or simply talk mortgages – I encourage you to call me – I’d love to chat.