What These New Mortgage Rules Mean For You

NEW_MORTGAGE_RULES_2018

If you are one of the 37% of Canadians who are not aware of the new mortgage rules, then this article is for you!

On January 1, 2018, the Office of the Superintendent of Financial Institutions (OSFI) made significant changes to the B-20 guidelines that have significant impact on those looking to purchase a home.

These new changes indicate that all uninsured mortgage borrowers (those with down payments of 20% or more) must now qualify against the Bank of Canada’s five-year benchmark rate (currently sitting at 4.99%) or at their contractual mortgage rate + 2% additional. For example, if your contract rate is 3.34% you must qualify at 5.34%. The purpose of this is to ensure that borrowers can service their mortgage debts as interest rates rise (as they are predicted to do so in 2018).

As some of you may recall, similar measure were issued in October of 2016. The stress-testing regulations at the time only applies to those with an uninsured mortgage (those with less than 20% down). These new rules and updates to B-20 essentially mean that ALL mortgages will have to abide by stress testing.

 

To better understand how this will specifically affect buyers, we spoke with Mortgage Expert, Geoff Lee of GLM Mortgage Group and he broke it down for us in the table below*

Picture1*based on a dual income family making a combined annual income of $85,000

As you can see, your borrowing power is drastically changed. You are able to borrow $105,000 less with these new changes, meaning you qualify to purchase a home worth $105,000 LESS than before these new rules were introduced.

However, this is not all bad news for first-time buyers. This can effectively cool a relatively hot market here in the Fraser Valley and Vancouver. It can also limit the competition and allow for more buying options for buyers who are able to put the 20% down and pass the stress test.

This announcement also comes at a time when condo and townhome development is at an all-time high, providing affordable, accessible housing options for many buyers.

Buyers can also look to accommodate these changes by laying out a budget and sticking to it! Re/Max has a great layout for this:

  1. Maintain a financial buffer of at least three to six months, to soften the blow of interest rate increases and unexpected bumps in the road.
  2. The mortgage you qualify for and what you can actually afford are two very different things. Look at your lifestyle, now and in the future, and consider how your mortgage payments and ongoing home costs will impact you. When buying a home, you might have to make some compromises on lifestyle in the interest of homeownership.
  3. Buying a home involves more than just mortgage payments. Ongoing expenses include maintenance, home insurance, property taxes, and utilities.

Entering the market in 2018, or looking to purchase a new home need not be a stressful or worrisome experience. We work with some fantastic brokers who can help you get a sharper rate and we can help you find your next home well within your budget. Give us a call today and let us help you: 604-533-3491.

Advertisements

How the Bank of Canada’s Interest Rate Hike Will Affect You and Your Mortgage

On July 12, we saw the first rate hike from the Bank of Canada. The rate was raised 0.25% from 0.5% to 0.75%. This was the first increase since September 2010 and more will come this year.  What do these increases mean for your fixed or variable rate mortgage? 

Mortgages

Your home may be the biggest purchase of your life, and anything that could affect the amount you are paying each month is important.

 

For a Fixed Rate Mortgage:

  • Payments for current homeowners stay the same
    • The interest rate on this type of mortgage is fixed so no matter what the Bank of Canada does, your rate will not change until your mortgage is up for renewal.
  • Increase at mortgage renewal
    • If you are at the end of your mortgages’ term, you will have to renew and your rate will change accordingly. This is not all bad news as the rate that you initially had at the start of your term (typically 5 years) may have been higher than the current rate is—even with the rate increase. To check what your future mortgage payments might be, I suggest using GLM Mortgage Groups’ Mortgage Calculator.
  • Higher Rate for Prospective Homebuyers
    • First-time home-buyers may have a higher rate if they are applying for a mortgage. Remember that the Bank of Canada will raise their rates in small increments (0.25%) at a time. Also, each increase translates into around $13 per $100k—an increase that most people can afford (though it may mean sacrificing a coffee run or two per week).

 

Variable Rate Mortgages

  • Your Payments Will Increase
    • A variable rate mortgage moves up or down with the general level of interest rates in the economy. This recent Bank of Canada hike means your mortgage payments will go up, but the amount you will be paying will be affordable, working out to around $13 per 100k
  • Should you switch to a Fixed Rate?
    • Deciding to lock into a fixed rate mortgage, depends on your ability to handle an increase in interest rates over time.  Historically, borrowers who stay in a Variable Rate Mortgage (VRM) tend to save more money over the course of the term. It is important to make an informed decision and to understand how Variable Rate Mortgages work.  Locking into a fixed rate may cost you more money than what an increase in your VRM would be.

The Mortgage Payment Calculator can show an estimated mortgage payment based on a new rate.

So there is no need to panic about these interest rate increases. It is important to stay informed and to budget for them.  The effect these increases will have on the real estate market remains to be seen.  This increase was the first one since 2010 but as we continue to get information we will keep you updated!  If you have any questions, please contact Young Real Estate Group and we can put you in touch with the best professionals out there to help you navigate these mortgage rate changes.