On October 3, 2016, Canada's Finance Minister Bill Morneau announced new mortgage eligibility criteria for both homebuyers and lenders. The new mortgage rules, which appear to be tougher than before, could have a significant impact on Canada's mortgage industry and its real estate market.
Morneau highlighted during his press conference that more and more middle-class families are taking on high levels of debt in a rush to buy. But by implementing these new regulations, the mortgage qualification process will become more robust and it will be easier to determine whether the borrower has the capability to make payments even if interest rates go up or if their income goes down.
The New Mortgage Rules
The new mortgage rules took effect on October 17, 2016. Under the guidelines, the qualifying rate on all new five-year mortgages, for homes that cost under a million will increase. In addition, there will also be more restrictions on the insurance of low-ratio mortgages. From now on, it is required that all such loans should have an amortization period of less than 25 years and the homes should be owner-occupied.
The new mortgage rules include a stress test for all mortgage applications. This is to ensure that the proposed borrower will be able to service the loan in case interest rates rise or in the event of any change in their financial situation. These tests were previously not required for fixed-rate mortgages longer than five years but that will no longer be the case. Those planning to but can check the 5 year fixed mortgage rates as well as the 5-year variable mortgage rates to see which is more feasible.
The new lending rules are designed to tighten lending rules in Canada and limit the amount of money that can be borrowed by Canadians. These changes have been implemented keeping factors such as higher interest rates and higher housing prices in mind.
The Impact on the Real Estate Market
Tougher criteria are bound to make it more difficult for mid-range buyers to secure mortgages from regulated financial institutions. This would be especially true for buyers who are putting less than 20 percent down. This basically means that home buyers will need to resign to the fact that either they come up with a larger down payment or lower their expectations about the kind of house they can afford.
The real estate market has been buzzing with uncertainty since these changes were announced. Some are calmer than others and feel that nothing much would change but there are others who are predicting dire consequences for the industry as a whole. Ross Kay, real estate data analyst believes that this is too radical a change and something that has never before happened in North America.
He feels that no sensible buyer would go out and buy a home under these circumstances. This would thus wipe out many first-time buyers from the market. Kay predicts a 17 percent decline in national average sales prices. It is expected that the condo market will suffer the most and smaller areas will see more decline in home sales as compared to bigger cities as they have strong economies and strong real estate markets.
Overall, there has been a mixed response to the changes. Some lenders are of the opinion that they will take a big hit because of these new regulations. According to the First National Bank, Morneau's new mortgage rules will impact nearly 41 percent of its insured residential mortgages and would result in a decline of 10 percent originations of this kind as the loans will no longer qualify for insurance.
While the federal government claims these measures are designed to contain the risk associated with over-leveraged homebuyers, some industry experts feel that it may actually increase the overall risk for the Canadian economy as borrowers may turn toward the shadow banking sector, which already accounts for 40 percent of Canada's banking space.
According to Gregory Klump, the chief economist of the Canadian Real Estate Association, these changes will have the biggest impact on markets where there is a short supply of homes in the low price range as compared to those which are more balanced as buyers would simply buy cheaper homes.
Janet McKeough, the Director of the Canadian Mortgage Brokers Association explains that by tightening the qualifying rates, these measures will reduce the buyer's borrowing power by 20 to 25 percent. The measures may be feasible for places like Ottawa but for smaller markets like Halifax with lower income levels and tougher rules, this could make it even more difficult for first-time home buyers to get into the market.
Only time will tell about the specific impact on the real estate market in terms of home prices, home sales, increase or decrease in first-time buyers and so on. However, there is no doubt that the new regulations will make the mortgage approval process tougher for most first time home buyers and single income households. On the other hand, it is also possible that these measures will have a correctional impact on the market and will filter out buyers who may actually face problems in making payments in the event of higher interest rates or changing financial circumstances.