New mortgage rules will affect first-time buyers

Those with less than 20% down will qualify for a lot less

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OTTAWA – Canada’s first-time home buyers may have to shelve their dream house fantasies due to lending changes announced this week by the federal government, mortgage brokers say.

Ottawa moved this week to tighten mortgage lending rules that will limit the amount many Canadians can borrow to help ensure that when interest rates rise, they’ll still be able to make their payments.

Mortgage broker Frank Napolitano says that means the size of mortgage many buyers will be able to qualify for will be less once the rules take effect on Oct. 17.

“First-time homebuyers will probably have to probably scale down the type of home that they may have planned to buy,” said Napolitano, managing partner at Mortgage Brokers Ottawa.

Under the new rules, a stress test that had only applied to borrowers who opted for variable rate mortgages or fixed rate mortgages with terms less than five years will now be used for all home buyers with less than a 20 per cent down payment.

That means borrowers must be able to qualify for their mortgage using a higher interest rate than they will actually be paying on their mortgage.

The advertised special offer rates for a five-year fixed rate mortgage at Canada’s big banks are around 2.5 per cent. However, the Bank of Canada-posted rate used in the stress test is 4.64 per cent based on the posted rate at the big banks.

“You’re not paying more, but you’re going to be able to buy less house,” Napolitano said.

The idea is that potential home buyers must be able to show that if interest rates were much higher than they are today, they’d still be able to make their mortgage payments and other costs related to home ownership.

Napolitano used an example of a Canadian earning $70,000 a year with enough saved for a five per cent down payment, and carrying $500 a month in non-mortgage monthly debt payments such as a car loan.

Based on a five-year fixed-rate mortgage of 2.44 per cent, he estimated they could qualify for a loan that would allow them to buy a house worth about $370,000 under the old rules.

However, under the new stress test using 4.64 per cent, Napolitano estimated that same home buyer could only afford to buy a home worth about $280,000.

Jason Scott, a broker with the Mortgage Group in Edmonton, says many of his clients would not have qualified for their mortgages under the more stringent rules.

He noted that it isn’t uncommon for nervous lenders to turn down borrowers who just barely qualify or require a co-signer or a larger down payment.

“People who have less than 20 per cent down are going to qualify for a whole lot less money,” Scott said.

Napolitano said for some buyers, the changes may mean that they will have to settle for a less expensive property, save for a larger down payment or wait until they are earning more in the future.

“I think it’s going to take some people out of the market,” he said.

“There’s no question that some young Canadians that had aspired to buy a home, may have been ready to buy the home this year, but now I think they may have to wait.”

9 comments on “New mortgage rules will affect first-time buyers

  1. The Govt. seem to be targeting only first time home buyers. In reality they have been out of buying process long ago since the housing become impossible to buy in GTA. My thinking, Govt. should crack down those people who own more than one property as their principal home. Either they are renting out other properties or waiting to increase the price . Those people should be taxed may be 15% of their renting income to discourage them to buy more properties instead targeting first time home buyer.

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    • Agreed Saumil and as well Ontario needs to quickly move forward with the foreign buyer tax! Enough of the “wait and see” line of crap while they line their pockets.

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    • Well, I would agree with the government, as if somebody looks at the longer picture, that, at present we have a mortgage rte of 2.44%, but why it is at 2.44%? because our economy is down and we have no option other than this, but when after a year or two, oil prices hiked up and economy is getting a boost up they need to increase the mortgage rate to make CAD stronger. in that case 90% of first time home buyers will feel a havoc, BECAUSE, they are on edge of cut to cut income-expense ratio. even if the mortgage rate hike by 1% there is a difference on almost costing $400 per month, and income is not that much increasing in canada, so either pay 20% down or atleast be ready for 2% hike in interest rate. This is safe for all, for us as a first time home buyers, for banks and for economy.

      I appreciate this step by government.

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    • I think this new rule really hurts the realtors and first time home buyers ,it doesnt hurt the people with higher incomes because they can afford it but a first time buyer or someone moving up to their next home this is going to shut the housing sales in the townhouse and condo area by lower there worth,because they cant afford that much of a down payment approx 60,000 is allot of money for a first downpayment on the average 300,000 townhome i think the government should of thought about this better before putting it through

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  2. Banks are borrowing from central bank and from investor 0.5% and home buyers will borrow from them 4.64% .It does not sense for me that bank is earning 4.14% is this justified the younger people trying to get a home to start a peace full life. Who is going to benefited from this rule banks , financial institutions?

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  3. It’s the same as CMHC insurance when you had less than 10% down payment. People end up spending just as much but they’re only eligible for condos. So their homes aren’t worth as much but with condo fees skyrocketing, no one is saving.

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    • Why can’t the Government bring in similar Condo laws to control the rapid high increase of Condo Fees most times with the annual high fee increase the owner of the Condo (mostly Seniors) can no longer afford to pay both Mortgage and Condo Fees. The Government need to intervene here.

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  4. Lets not forget the ripple effect that the goverment put on all Canadians. From a builders point of view the ripple effect that will arise from this will be major. The 6-8% of market they say will be affected is ludicrous. It will be 90%, beacuse the 10% of the wealthy will never be affected. The ripple: The builder cannot sell their product until a customer can save enough for the larger down payment, The builder now cannot build as many homes and the sub-trades no longer have work, the suppliers and manufactures of products no longer have as many sales, the effect continues the employers to these companies start laying off employees due to lack of sales. The layoffs will be enormous. People start losing jobs, foreclosures are happening more and more. Did the finance minister comtemplate the ripple effect on his decission? This is surely not the way to stimulate an economy that is slow already. If it is just the high high end homes sales, then they should come up with a better solution for those only, and not railroad all of Canadians in believing they are doing them good for the economy.

    Pat McGaffey

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  5. So those of us who have bought a house at a higher price will now lose most of the value of their homes and will be paying a mortgage worth more than their home. Many of us who are not wealthy will be affected by this loss; significantly. Not just the first time home buyers, but the recent home buyers even more so, because when the cost of housing is forced down the new first time home buyers will be ok. The recent home buyers will suffer, among others.

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