Canada Just Released New Mortgage Rules: Here’s What You Should Know
It’s no secret that home prices in Canada have been raising at an alarming rate over the past few years. Some of the country’s biggest cities have seen massive increases in price point year after year, with Vancouver and Toronto arguably leading the charge. Needless to say, this has posed some concerns relating to the country’s economic stability; how much longer can this trend continue? The increased pricing that we’ve seen year after year has not been in line with inflation, and it seems that the market has been living in an unstable bubble bound to pop without an adjustment. In an attempt to stabilize the Canadian markets, new federal rules were backed by the Bank of Canada, and launched on Monday October the 17th 2016. The theory here is that over time, the new rules will drastically decrease the risk of Canada’s financial system becoming unstable. The idea is to protect home owners from taking on too much debt. Whether or not the new rules will achieve said goal is yet to be seen. Either way you slice it, the rules have been implemented, and anyone considering a home purchase in the foreseeable future will be affected by them. Here’s what you need to know.
What are the New Rules?
Essentially, the new rules involve a Stress Test designed to predict whether or not a potential home owner will be able to pay off their lone in the event that interest rates rise, or that they encounter personal financial change. This is a brand new concept as stress tests were never required in the past. The stress test will include 5 year mortgages, which is the most common type in Canada. The test itself will require borrowers to qualify at the Bank of Canada’s posted rate of 4.64 percent, even though mortgages are currently being offered at around 2.5 percent. Moreover, in February of this year we also saw the implementation of new rules that have affected, and will continue to affect, active buyers: Home buyers in Canada who are considering a property purchase of $500 000 or more, now have to source a minimum down payment of least 10%. Home’s that are listed under the $500 000 mark can still be purchased with a down payment as little as 5%, and homes over the $1 million mark still require a 20% down payment.
So What Does this Mean?
There are a number of implications here. For starters, first time home buyers will likely be affected more than anyone. First time home buyers will be forced to look at smaller priced homes as a result of the stress test and the higher down payment requirements. With that said, the drastic increases in average price point have greatly limited the inventory of smaller priced properties in many major cities. Those of us looking to sell their homes in order to upgrade or downgrade will likely be affected much less, as they will have already built up a strong amount of equity in their home. With that said if the new rules do what they set out to do, first time home buyers may be in a better position a few years down the line as the industry starts to level out. At this stage, they’ll simply have to be patient, or have to find a way to make a little bit more money.
Most people looking to buy won’t be able to afford as much home as they would have in the past. This will, presumably, slow the market down and prevent people from taking on debts that they can’t handle; in turn, it is expected that home prices will decrease over time, giving the market a chance to slow down to the rate of inflation, thus evening out the economy. The areas that will be affected the most are the cities that have seen the biggest rise in price points over the years, primarily Vancouver and Toronto; the rules apply across the entire country, however most cities have not seen the drastic increase in pricing that has been seen in these two metropolitan powerhouses. As a result, Vancouver and Toronto now have a shortened supply of inventory, particularly in the lower price range. The concept is that these rules will minimize the amount of transactions, and see lowered pricing across the board as a result.
Many in the industry also believe that the “stress test” will result in higher mortgage rates in the years to come. Essentially, these new rules will minimize competition in the mortgage market, which will result in less approvals and higher interest rates. This will have a negative effect on consumers, and may trump the positive effect of lowered home prices in the future.
As it stands, there’s no way to accurately gauge how these new rules will affect the future of the real estate market in Canada. There are both positive as well as negative potential outcomes, but at least something is being done to level out the market. Time will tell if the desired effects will take place, or if some other rules and regulations will need to be implemented.