The year 2018 is around the corner, and Canadian homebuyers are going to face a very tough mortgage approval procedure as soon as we step into the new year. Since OSFI announced the introduction of new stress tests this fall, the real estate market became one of the major topics again.
The real estate market has gone through some turbulent changes this year, and we have seen the government intervene to stop the rising home prices, especially in Toronto and the GTA. Luckily, some of the measures, like the 15% foreign tax introduction, slowed the market down indeed, but only to some extent. To get the market back to normal, the measures were accompanied by the interest rate increase, and somehow, it was still not enough. Now Canadians are awaiting the federal rate changes.
Namely, as of January 1, 2018, applying for a mortgage will be far harder than it is today. As of the New Year, all mortgage applicants will be subject to new stress tests which include qualifying at a higher rate than the contract rate. As an example: if your rate is 3.7%, the application must be qualified at 5.7%. Again the mortgage rate would only be 3.7% but the application must be approved as if the rate was 5.7% to ensure the affordability is still maintained at a higher rate.
Of course, such a practice will limit the purchasing power by 20%, but looking long-term, it will protect buyers from another interest rate hike. Some experts predict that home prices will drop slightly and that there may be a reduced number of buyers able to purchase, while others are saying we are in for a moderate increase. Time will tell.
Even if the mortgage costs remain the same, homebuyers won’t be able to borrow as much money from the lender as they can now. In fact, it could be up to 15%- 20% less than today, but how much exactly, will depend on one’s credit report. For example, if your yearly income is $60,000, you can currently qualify for a mortgage in the amount of $409,600, but as of 2018, you’ll only be able to qualify for $334,300 with the same annual income.
What Can Homebuyers Do?
Canadians are weighing their options and trying to find the best way to get their desired mortgage amount. There are ways to cope with the new market conditions, and one of them is to opt for a longer amortization period, e.g., choosing 30 instead of 25 years. Although slightly more interest paid over the term of the mortgage, this option offers buyers a lower payment and a bit longer time to pay off their mortgage. Buyers may also consider turning to a private lender, but should carefully examine if the private lenders will offer acceptable interest rates or any hidden fees.
There is a lot of speculation on how the new rules are going to affect buyers and it is important you receive the right information. We have trusted advisors that we can put you in touch with to get you the right answers. Send us an email or give us a call, we are glad to help!