There was a lot of chatter in Ottawa this past fall over new mortgage rules and how these changes may impact first-time home buyers.
Here is a summary of what’s new and what has changed regarding home purchases:
- The key difference for Vancity members is a new standardized mortgage rate “stress test” for insured mortgages (financing for less than a 20% down payment).
- Prior to this change, only members who took out mortgage insurance on a variable rate and/or mortgage with less than a five-year term had to undergo a stress test.
- Members needing an insured mortgage must qualify based on the Bank of Canada conventional five-year fixed posted rate. This rate is typically higher than the negotiated rate offered by financial institutions. Currently, the Bank of Canada rate is 4.64%.
- This change may affect the size of the mortgage available to a member.
Here’s a purchase example to illustrate how the new regulations work: someone with a $60,000 annual income and a down payment of 5% will likely qualify for a $280,000 mortgage under the new mortgage insurance rules, compared to qualifying for a $345,000 mortgage under the old rules.
This example is based on the following:
- Good credit
- Little to no consumer debt
- Property taxes of $100
- Strata fees of $200
- Heating expense of $50
- Contract rate of 2.79%
- Bank of Canada rate of 4.64%
So is this good or bad?
The good news: members qualify as if rates were higher to ensure that, should rates rise, they will be able to afford the increase. The bad news: in this (still) very expensive market, buyers – especially first timers – have fewer options for what they are able to purchase.
Qualifying for a mortgage is never a “one size fits all” exercise. When looking for a new home, determining your financial comfort level is just as important as deciding what comforts you’d like your new home to have.
And now a note from our lawyers…