should you buy before january 1?
Most people have heard about the new mortgage rules that will be implemented January 1, 2018. The new rules are a continuation of a stress-test that was issued back in October of 2016 that applied to high-ratio and all insured borrowers. The test made qualifying for a mortgage a lot more difficult since instead of being able to qualify at the bank's contract rate, high-ratio borrowers had to qualify at a hypothetical interest rate, being the Bank of Canada's overnight lending rate which is currently 4.99%.
In January of 2018, new rules mean all borrowers, regardless of their down payment size, will have to qualify at the either, the contract rate + 2% or the benchmark rate of 4.99% (currently), whichever is greater.
As you can see, having to qualify by much more stricter criteria, will only mean fewer borrowers will be able to qualify for financing. This is precisely the reason for such measures. Inadvertently, while less people can qualify, those selling their homes will have no other choice but to reduce their sale price. So, in this case, we may see the housing market decline drastically with some experts suggesting a correction of beyond 40%. But is this the only scenario that may play out? No.
The new mortgage rules are implemented by the Government and therefore, only apply to Federally regulated institutions like major banks. There will be other options for borrowers and there may be some unintended consequences of the new stress test that will negatively impact younger borrowers as well those who are already considered low-risk.
For one, alternative lenders who don't have to adhere to such criteria will become very competitive and a much needed go-to lending source. Therefore, if more borrowers are accessing an alternative source of financing, housing prices may not be affected. At the same time, however, more people will be entertaining higher-interest loans that are offered within shorter terms. For example, a one or a two-year term, since alternatives don't typically offer five-year terms. Their most favourable rates are those with shorter terms attached. This is not exactly the plan the Government had in mind and perhaps, the Government didn't realize that major banks are not the only ones lending mortgage money.
Some credit unions will be a great source for borrowers when they have been turned down by banks, although some of them have already been using their internal stress -test long before even the first stress-test was introduced.
Mortgage brokers - the good ones, meaning the ones who have access to a plethora of both credit unions and alternative lenders, will be the best source of financing regardless of whether a borrower was approved at a major bank or not.
But remember, and I say this honestly to benefit you, the consumer, mortgage brokers typically get compensated less by credit unions and alternative lenders and therefore, brokerage fees will be something borrowers need to be made aware as they calculate their total cost of borrowing.
Additionally, not all mortgage brokers have access to every lender who may be able to offer competitive rates and not have to adhere to Government stress-test regulations. This is why it's crucial that borrowers shop around and consult a few different sources and even mortgage brokers to ensure in a tough market, they get the best deal.
What does all this mean if you buy before January? Well, if you are a high-risk borrower, you will get to qualify using 4.99%, which may change after January. You may end up having to qualify at over 5.5% if you wait, which could be a deal breaker.
If you are a low-risk borrower, meaning you have 20% down or more, currently, you get to qualify at the contract rate being approx. 3.09%. After January, you too will have to qualify at either 4.99% or the contract rate, plus 2%. This also may be a huge deal breaker for you.
If you have any questions about qualifying for a mortgage, or want to know about your existing mortgage approval or pre-approval - and whether it's still valid, please do not hesitate to contact me at any time. I would be happy to assist you at no charge.
You can call directly 647-773-4849.
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929