New Qualification Limits Guaranteed To Cause Harm

By: Thomas Cook

New Qualification Limits Guaranteed To Cause Harm

 

For certain the Ontario government didn’t anticipate that their 15% tax on foreign investors initiated in late April would swing Toronto’s real estate market the way it did.
 
Now there’s a new proposal that is aimed at further limiting sales.
 
One of the biggest ‘market disrupters’ may be coming at the end of October and taking effect for January 1st.  That’s the ‘stress test’ guidelines proposed by the federal Office of the Superintendent of Financial Institutions designed to keep condo and house buyers from taking on too much mortgage debt.
 
Right now, borrowers with less than 20% down payment are already subject to stress test rules whereby buyers have to qualify for their mortgage based on the Bank of Canada 4.84% rate instead of the rate the bank or lender is actually offering (i.e. 2.5% to 2.9% for a 5-year fixed mortgage).
 
The theory behind this, which does make sense for buyers with low down payments, is to ensure that, if market interest rates rise by up to a full 2%, they’ll still be able to afford making the payments and avoid defaulting.  
 
However I’m not so sure it makes sense for those with over 20% down who have a large cushion of equity to protect both the home owners and the banks in the event rates rise and there’s a danger of defaulting on the mortgage.
 
By the way, Canadian mortgage default statistics are among the lowest we’ve ever seen… way less than 1%… so there’s not an urgent need to make things stricter when there’s a big down payment being used.  
 
If approved, the result of these guidelines will be that Toronto condo and house buyers with more than 20% down will also have their buying power cut by almost 20%.  For example, to qualify for a $500,000 mortgage, a borrower would have to prove they have the income and could afford to pay an additional $545 per month in mortgage payment.
 
Here’s another way to look at it.  If a buyer has say $70,000 in annual income, right now they could qualify for a mortgage of about $450,000 based on current ‘discounted’ rates.  On a $500,000 property purchase, they would need a $50,000 (or 10%) down payment.
 
Under the stress test proposed, that approval amount would drop to about $335,000… a huge $115,000 reduction in the price of a condo or house they would qualify for.  Therefore, on that same $500,000 property purchase, they would NOW need a $165,000 (or 33%) down payment.
 
This new regulation, if implemented, might cause a flurry of sales this fall as buyers try to avoid these cutbacks in mortgage qualification but it also might result in a market slowdown once they’re in place in 2018.
 
My prediction is that, if implemented, this will skew the market even more towards condominium purchases where the average downtown suite sells for about $600,000.

Don’t Let This Be YOU !!!




As almost everyone gets ‘financially fit’ and has a stable income, they start thinking about where they’re living.
 
Maybe they’re tired of living in a basement apartment or in a rental suite which they don’t own and can’t customize to their own taste.
 
At the same time, many people think they’re not able to buy a condominium or a house because they lack the down payment or monthly income.
 
Why put off home ownership ‘For Later’ while there is an excellent way to get yourself started right now.
 
To give you some excellent advice and insights into how you can get the process started, I’ve written a book entitled ‘Ultimate Toronto Home Buyer’s Guide’ and it’s free for you to download.
 
It’s written in easy-to-read common sense language but with enough detail to excite you about making the first baby steps towards home ownership.
 
You can download the PDF or order the paper-back book for free HERE.