It might not come as a surprise to hear my opinion on the latest mortgage rules introduced 7 months ago on January 1, 2018. Simply put, I don’t think they are appropriate, and in fact, they are hurting Canadians in more than one way.
The ‘stress test’ rule seems almost counter-intuitive to what was supposed to happen, and I’ll tell you why…
In our red hot market (Vancouver), it was meant to ‘cool’ everything down. Housing prices were predicted to fall as mortgages got harder to qualify for. To no one’s surprise with less mortgage, the unaffordable (old, and small detached home with a million dollar + price tag) became even more of a distant dream. Move-up buyers hoping to upgrade their space were forced to consider the more affordable option which were condos, townhouses, and apartments. With more demand, condo prices have been pushed even higher making it difficult for prospective buyers get in to the market, or upgrade to a more suitable sized home from the ‘spacious’ one + den, 600 sq ft apartment. The intended cooling actually inflated the cost of condos since supply is still too low for the demand in the market.
Here are 3 ways Canadians are getting hurt with this new government interference. Most common amongst all 3 situations is that many homeowners are now stuck.
1. Mortgage Up for Renewal? Good luck…
Traditionally when a mortgage is up for renewal, homeowners look through their best options and may even renew with their existing lender if the term and the product is favourable. Now (after the stress test rules were introduced), they may not have a lot of options other than renewing with their existing lenders’ less than favourable terms.
Why? Because they may no longer qualify for even a smaller mortgage that they qualified for 5 years ago under the old rules. As a broker, I pride myself in helping my clients find the best lender and mortgage for their unique needs. The new rules essentially made it so that if clients want to renew with their existing lender it would be easy. But, in order to seek out their best option, they must qualify under the new rules or explore more expensive options. Simply put, the lender will have the upper hand, and no longer is in a rush to offer the borrower a competitive mortgage at renewal. If the borrower doesn’t have a choice (which is already happening in many cases) they are staying put. If this is protecting consumers, then I have it all wrong.
A recent Bank Of Canada analysis said that “Some 10 percent of Canadians who got an uninsured mortgage between mid-2016 and mid-2017 would not have qualified under the new standards.” What happens to these people when their term is up and they try to renew their mortgage? It’s not a pretty picture!
2. You Refinanced, you saved, now what?
And what about the people that refinanced and took advantage of consolidating their debt and using the home equity they worked so hard to get? It’s all fine and dandy now, but come renewal time, what happens? Qualification becomes hard as noted above. If things gets really really bad, the new rules will push home values down which reduces the total equity that would be left in the home.
3. To port or not to port
Last, but certainly not least, are the people in the “port” category. ‘Porting’ is when you sell your home and literally move your mortgage with you to the next home to keep your rate and avoid a penalty. Recently, my client was affected and I am sure that she won’t be alone. After living in her home for a year, she wanted to move closer to her job and found a place within her budget. The problem: under the new guidelines she qualifies for a smaller mortgage and can only port 80% of her mortgage. Since her down payment will be coming from the existing property, the decrease in her mortgage and increase in condo prices have left her stuck. She can sell and rent or continue to be at her current home until she is able to increase her savings substantially, or get a huge salary raise.
I’ve come into contact with many clients who have had to delay their plans to purchase their next home both because of the new stress test, and the increasing benchmark rate. They are either wiped out of the market, can not refinance their debt as they planned, or do not qualify altogether as their mortgage limit has kicked them out of the market.
In a year with large numbers of mortgages up for renewal, this was a really bad decision for the consumers. We didn’t see any lenders complaining about this, but then again why would they? They have the upper hand, and it was created by our government to “protect us.”
In this market where no two situations are alike, don’t rely on what your friend did last year to get in the market. Rules are always changing, and so will how much you qualify for. Connect with a independent mortgage broker to help you navigate not only the rules and changes, but to help make a plan for what’s right and affordable for your situation.
How have these new rules impacted you? I’d love to hear your story in the comments.