A first-time homebuyer could need to earn as much as $500 more a month and would have to pay an extra $209 toward their mortgage each month under new mortgage rules that the federal government announced Thursday.
The changes, which apply to government-backed insured mortgages, will mostly affect first-time home buyers looking to get into the condo market, mortgage brokers told The Sun Thursday afternoon. These changes mean up to five per cent of Canadians who might be considering buying a new home will likely no longer qualify.
Vancouver-area mortgage broker Dave Foran said typical first-time homebuyers are singles or young couples in their 20s, who are in stable jobs with decent incomes, and are looking for homes priced in the $350,000 to $400,000 range.
For the fourth time in as many years, Finance Minister Jim Flaherty moved to tighten the mortgage and lending landscape, including reducing the maximum amortization period for government-backed insured mortgages to 25 years from 30.
Although at least one bank, TD Canada Trust, praised the restrictions, the development industry is concerned. The changes will hit affordability and are overly dramatic, said Neil Chrystal, president and CEO of Polygon Homes and board member of the Urban Development Institute, which represents the province’s development industry.
“The reality is that in Vancouver, sales have already been moderating in the last six months. For detached homes in Vancouver, the average price is down 12 per cent and sales volumes are down 25 per cent,” Chrystal said. “I think that’s proof that the market is self-correcting.”
The amortization period is the length of time it would take to pay off the entire loan for the mortgage. Shortening this period means both higher monthly payments and a higher income needed to qualify for the mortgage.
A $400,000 high-ratio mortgage with a 3.19-per-cent interest rate would require an extra $6,000 per year in income, or $500 a month, to qualify for the new shortened amortization period of 25 years, according to an example provided to The Sun by Vancouver-area mortgage broker Dave Foran. The monthly payment would jump from $1,973.09 to $2,182.19.
(A high-ratio mortgage exceeds 80 per cent of the home’s value — or the home is bought with less than a 20-per-cent down payment — and must be insured by Canada Mortgage and Housing Corp.)
The government also lowered the maximum amount people can borrow when refinancing a mortgage to take advantage of accumulated equity in their home, to 80 per cent from 85 per cent. Flaherty said he is making the changes, which build upon earlier restrictions, to “help to ensure households do not become overextended.”
Bank of Canada governor Mark Carney has been warning for several years that some Canadians are getting in over their heads with debt and that they could face problems once interest rates — which sit at historic lows — start rising or if there is a another economic crisis like the one in 2008.
Richmond mortgage broker Chris Pughe said the reduction in the amortization period will increase monthly payments to the same degree as a 0.9-percentage-point rise in interest rates. On a $290,000 mortgage at 3.3-per-cent interest, with a 30-year amortization, the monthly payment would be $1,270.08. The same mortgage with a 25-year amortization would require monthly payments of $1,420.89, Pughe said. The extra $150.81 per month would require additional monthly income of about $380 to qualify.
She also said the changes would affect nearly every first-time buyer in the Lower Mainland.
Vancouver mortgage broker Jeff Trounsell said about 65 per cent of his clients need mortgage insurance.
“A change in the amortization period down by five years is going to affect most people’s buying power by $10,000, $20,000 or $30,000,” Trounsell said. “In today’s housing market, that can be the difference between a really nice place and an average place. Most first-time homebuyers are trying to get into something they really like by pushing their limits. More veteran homebuyers don’t try to push the envelope as much.”
Foran said he doesn’t expect the changes to have a large impact on the overall housing market, because they only affect buyers with less than a 20-per-cent down payment.
“No doubt it will have an impact on the first-time buyers who are scrambling for down payments and possibly paying off some credit card or line of credit debt,” Foran said. “Overall, I see this as another good step by the government to take the necessary steps to assure Canadians that we will not end up like other parts of the world. It’s just tightening the screws a little. It makes good sense at this time.”
Vancouver realtor Michael Tudorie called the changes “prudent.”
“The buyers I’ve seen this year have been very qualified and would still be approved under these new guidelines,” Tudorie said. “Hopefully the news will push those on the sidelines and we’ll be busy the next two weeks.”
Trounsell said he was busy going through all of his pre-approvals to see which of his clients might be affected by the changes. One buyer he is working with is a young professional with great credit and no personal debts who wants to buy a home with a basement suite that brings in about $800 a month in rental income.
If he is able to buy before the new rules kick in, he can afford a $700,000 home with a $643,860 mortgage, including insurance, and will have payments of $2,773.58 a month. After July 9, the maximum mortgage he’d be allowed to carry will decrease to about $566,100 with insurance, dropping his top possible purchase price to $625,000, Trounsell said.
The government also fixed the maximum gross debt service ratio at 39 per cent and total debt service ratio at 44 per cent. These ratios compare a borrower’s total monthly housing payments, or their total monthly debt payments to their monthly income, which shows the ability of the borrower to pay the interest.
The government also limited government-backed mortgages to homes with a purchase price of less than $1 million.
The changes do not affect conventional mortgages (those purchased with a down payment of more than 20 per cent), but both Pughe and Trounsell said banks sometimes tighten their lending rules for all mortgages in response to changes to government-backed mortgages.
“You can still get a 40-year mortgage with one lender, if it’s low ratio,” Pughe said, adding that it is too soon to tell which lenders will follow suit with the government changes for their conventional mortgages.
Although the changes will make it tougher to qualify for a mortgage, they will save consumers a lot of money in interest in the long run. “As just one example, the reductions to the maximum amortization period since 2008 would save a typical Canadian family with a $350,000 mortgage about $150,000 in borrowing costs over the life of that mortgage,” Flaherty said in a news release.
The changes come into effect on July 9, just more than two weeks away. When previous rule changes were introduced, about two months notice was given.