As you are probably aware, the Federal Government has recently announced a significant change concerning guidelines for borrowers of high-ratio mortgages; i.e., a borrower having a deposit of less than 20% of the purchase price of a home.
As of October 17, 2016, borrowers requiring mortgage default insurance need to meet the mortgage “stress test.” Essentially, a borrower must be able to carry a mortgage based on the then-current Bank of Canada rate (at this date being 4.64%) for a 5-year term rather than be able to carry a mortgage at the financial institution’s then advertised rate for a 5-year mortgage. (Currently, the average annual rate is approximately 2.6%, subject to variations from each individual financial institution. However, a borrower’s payment will be based on the actual rate charged by the financial institution for the mortgage, as set out in the mortgage commitment provided to the borrower).
These new requirements and guidelines do not affect homeowners with existing mortgages, nor any new borrowers with pre-approval mortgage commitments that were already in existence prior to October 17, 2016. These changes will also not affect individuals who are new borrowers, nor existing homeowners who do not require a high-ratio mortgage when their current mortgage needs to be renewed.
However, homeowners who do have an existing high-ratio mortgage will have to meet the “stress test” guidelines at the time these existing mortgages are due for renewal; the exception is where the homeowner pays down the outstanding balance by an amount sufficient to bring the mortgage out of the “high-ratio” category.
For the past several years, lenders have restricted the amount of loans for investment properties to an amount not exceeding 80% of the appraised value or purchase price, whichever is the lower amount. As a result, there have been a limited number of situations where default insurance has been required for the financing of investment properties. Co-Ownerships and private equity Co-Operative mortgages/loans have never qualified for high-ratio mortgage default insurance, whether owner-occupied or investment rental. Therefore, mortgages on these kinds of properties are not affected by the regulatory changes.
In my opinion, these changes will likely affect the ability of some first-time home buyers to qualify for a mortgage. They may also lead to a decrease in the number of first-time home buyers, fewer bidding wars, and changes in the move-up market. Ultimately, this could lower the ridiculous prices many people have been paying in the last several years for properties in the GTA Region and other locales.
As a matter of fact while recently presenting a seminar for the members of the Peterborough and the Kawarthas Association of Realtors, I learned that in the past several months, they have started to experience bidding wars for homes for sale in their area. This change in the market has of course been occurring in other cities as well! Where next???
These changes will possibly result in more people looking for rental properties in which to live; this increase has already led to rental rate increases of approximately 10% in some areas in the City of Toronto during the last year. I also have been advised by some realtors of bidding wars now occurring even for rental properties!
In conjunction with fewer investors purchasing real estate for rental purposes, we are seeing a noticeable increase in the number of new rental apartments being constructed by developers. We have also seen a decrease in the number of condominium units being purchased by investors for rental purposes. Is this going to become the “new normal”?
In summary, if you are in the house-hunting process – whether for your own personal occupancy or for rental investment purposes – or if you are looking to mortgage or refinance your existing mortgage, be sure to speak to your real estate agent, financial institution, mortgage broker, and/or financial investment adviser first before submitting an offer to buy a property or making arrangements to refinance your mortgage. Please share your thoughts with us on our website.