In 2017, the Canadian Government announced that it would be changing the rules regarding mortgages for Canadians. Coming into effect on January 1, 2018, the new rules will change how Canadians are approved for mortgage loans for houses. This article will assist you in demystifying the new mortgage rules.
Rules for Insured Purchasers
Currently, under the regulation of the Canadian government, anyone who purchases a home with less than a 20% downpayment is required to pay a one time insurance fee to the bank. This insurance fee is a reassurance to the bank, in the case that a mortgage payment cannot be made. Under the new regulations, buyers will not only have to pay for the insurance, but they will also have to be pre approved for a rate that is at least 2% higher than the initial mortgage rate they negotiated. This means that first time buyers need to have a higher amount for down payments and be ready to prove that they can attain that extra 2%.
Rules for Uninsured Purchasers
Under the current regulations for mortgages, anyone who puts a down payment of more than 20% of the mortgage is not required to purchase the extra insurance for the bank or be subjected to any financial additives. In 2018 when the new regulations are introduced, however, even those who hold a down payment of 20% or more will be required to pass a “stress test,” meaning they will have to qualify for a rate 2% higher than the initial mortgage negotiation.
The Effects for First Time Home Buyers
The introduction of the new mortgage regulations has caused some changes in the real estate market. First time home buyers with more than a 20% downpayment are now looking to buy before the new rules take effect in 2018. According to CBC, there is a feeling of panic, with potential purchasers speeding up the process of buying a new home so the new regulations will not affect them. This means that many homes are being purchased quickly, making the process of planning ahead difficult for first time home buyers. The new rates being introduced will also mean that first time home buyers will be subject to more debt and financial stress.
The Effects for Current Homeowners
Under the new regulations, current homeowners will exempt from the stress test, but this is only if they choose to stay with their current institution. Implementing this regulation means that when they are eligible for a mortgage renewal, current homeowners will be restricted from discovering lower rates elsewhere.
Consequences of the New Rules
Upon implementation of the new regulations, many experts are predicting that home buyers are going to be seeking more financial help from other sources, such as family loans, or instant loans. According to former MP Garth Turner, the new regulations are going to significantly decrease the number of young people looking to purchase, and might even completely deter them, causing an increase in the population of renters, and a significant decline in the housing market.
The Exception to the Rule
Upon introducing the new mortgage regulations, it was brought to the attention of the Office of the Superintendant of Finances that there would be detrimental consequences for new home buyers, especially those purchasing condos and high rise apartments. According to the Canadian Home Buyers Association, the average wait between signing and closing a sales contract can take months, and sometimes even years. Under the new regulations, the purchaser would need to requalify for the stress test in that time, causing between 19 000-20 000 families potentially breaching their purchase contracts. To prevent this $1.548 billion net loss in purchases from happening, the OSFI has made an exception to the rule for new homebuyers who are experiencing this situation.
Overall, the changes to the mortgage regulations are small. The new regulations will have an impact on the potential purchaser population, but there won’t be significant changes to the process of purchasing a new home. The 2% increase is so miniscule that potential purchasers will barely notice a change. The introduction of these new regulations will also ensure that the housing market is secure and safe for the banks, preventing any major financial problems for them in the future. For more information on demystifying the new mortgage rules, visit the Caliber Homes Blog.