Assessing Home Affordability in the Wake of New Mortgage Rules
Last month we saw a major change in the way high-ratio mortgages are now qualified and approved. A high-ratio mortgage is a mortgage where less than 20% of the value is being put down, and while these mortgages traditionally required CMHC insurance, the process to qualify for them was no different than any other mortgage.
However, on October 17, 2016, the rules changed. A high-level overview of the changes is simple: when applying for a high-ratio mortgage, you must now apply at a higher interest rate – the Bank of Canada’s rate – as opposed to your lender or bank’s posted interest rates.
These changes mean that high-ratio buyers must qualify at much higher interest rates than a conventional mortgage, but once approved, the mortgage itself will be based on market rates.
What Do These Changes Mean for the Average Home Buyer?
For most home buyers, this change means that they will have to qualify at a higher interest rate, but will then be approved for mortgages at the posted rates. Assuming you’re prepared financially and have a favorable debt/service ratio, aside from a somewhat “tougher” qualification process, not much changes.
Consider this: with a household income of $87,000, you can qualify for a $450,000 mortgage with 5% down. According to stats Canada, the average household income for Calgary in 2014 was $109,000. According to the October 2016 statistics from the CREB, the average home value in Calgary is $462,000.
These figures suggest that most homes remain within the sphere of affordability for most households in Calgary.
Where we do expect to see a significant change in buying behaviour is from first-time homebuyers. New grads and buyers tend to have smaller down payments, and as a result of that, this group of buyers are more likely to encounter the new qualification requirements.
Where many first time buyers may have been looking at a detached home, it is more likely that many will now look at townhomes, condos, and attached homes due to their superior affordability.
Looking at Your Finances Holistically
As a result of the mortgage changes, there is a renewed emphasis on overall financial wellness when assessing a home purchase. We are recommending that buyers that wish to utilize a high-ratio mortgage purchase their home before looking at financing cars, furniture, and acquiring other types of credit that influences their debt servicing ratio.
Relooking at the Concept of a “Starter Home”
Calgary’s real estate market went through an atypical period of sustained growth. Also atypical was the growth of household incomes alongside the real estate market. This resulted in many new buyers moving straight into larger homes, estate homes, and luxury condos.
With the new mortgage qualification rules, many buyers that may have been able to make the move into a larger home will no longer be able to do so. For the townhome and condo market, this raises the notion that these types of properties may become more prominent for new homebuyers.
While we prefer not to speculate on various aspects of the market, we can say that this suggests that we should see a stronger townhome and condo market moving forward.
What Are The Practical Best Moves for a New Buyer?
If you are looking at purchasing a home but find yourself swimming in questions, we invite you to book a meeting with one of our mortgage associates. By taking the time to learn your financial situation and goals, we will be able to provide you clear and accurate guidance about the best ways to move forward.
Remember: we work for you with no direct cost to you. We encourage you to leverage our services to ensure you get the best mortgage at great interest rate.