As many of you may or may not know, the Government of Canada has, over the past several months, intervened with the specific goal of slowing down red hot real estate markets such as Vancouver and Toronto. Most recently, the federal Government has implemented a new mortgage policy which relates mostly to first-time home buyers. This intervention will come into action as of October 17th, 2016. Considering that The De Boer Team works with many first-time home buyers and closely with many lenders, here is how this government intervention will impact YOU!
There are 3 main ways that this government intervention may impact first-time home buyers:
- You will need a higher initial down payment.
Let us explain. Before October 17th, most first time home buyer’s with less than a 20% down payment would qualify for a 5-year fixed mortgage because that was the only mortgage not using a higher qualifying rate. After October 17th, all lenders are required to qualify ALL insured mortgages at the Bank of Canada’s benchmark rate (currently 4.64%). This means, if you plan on putting 5%, 10%,15% or anything less than 20% down on a home, you will no longer be able to qualify at a lender’s posted rate for a 5-year fixed mortgage (currently around 2.50%). You will need to qualify at 4.64% and yes, even a 2.14% increase will make a big difference. One way to avoid not qualifying is to have a bigger down payment. If your down payment is over 20% of a property’s purchase price, you will not need to qualify at the Bank of Canada’s benchmark rate.
- If your salary remains the same your pre-approved mortgage will decrease.
If you cannot increase your down payment, you may need to increase your income. The reason for this is because of the explanation in reason number one. Instead of being assessed as to how much you can borrow at a rate of 2.50% you are now being assessed to see if you can afford to borrow the same amount at 4.64% which will inevitably increase your monthly payments. If you cannot increase your down payment or your monthly income, then you will have to decrease the amount you were expecting to borrow from the bank.
- Many buyers will likely require co-signers to secure the properties they desire.
Buyers, who had previously had their eyes on a townhouse, or single family detached home, will now more than likely require a co-signer on their mortgage unless they achieve either #1 a higher down payment, #2 a higher salary, #3 smaller purchase price or #4 they can decrease their monthly debt; The reason the government has implemented these changes. They don’t want the economy to implode with people defaulting on their loans such as mortgages, which many younger first-time buyers can barely afford. By having a co-signer, it insures that by taking on this higher mortgage, if the buyer is unable to make their payments, the liability falls on the co-signer. This will allow you to obtain a higher mortgage.