As you’ve most likely heard, last week an announcement was made regarding a change to mortgage rules nationwide (known as the B-20 Guidelines). The purpose of these changes is to stabilize the market, with a long term goal of managing long term debt by ensuring that buyers don’t over extend themselves when making a home purchase. We’ve been answering a ton of questions lately from our clients, so we put together this helpful FAQ to help you gain a better understanding of what’s to come. If there’s anything we’ve missed, feel free to contact us!
In summary – what’s going to happen?
Earlier this year, the mortgage rules were changed so that anyone putting less than 20% down on their home purchase was subjected to a Stress Test. This now applies for buyers putting down 20% or more as well.
What is a Stress Test?
Think of it as “rainy day” planning. The purpose of a Stress Test is to determine whether or not as a borrower, you can afford to pay back your mortgage if the circumstances were to change – essentially if the interest rates were to rise. As a purchaser, you are tested against whichever is higher: either the 5-year benchmark rate published by the Bank of Canada, or 2% higher than your contracted mortgage rate.
When do these changes take effect?
Lenders have until January 1st, 2018 to officially enact the new rules.
I’m looking to buy, what does this mean for me?
Your buying power will be reduced by about 20%, so if you take whatever you can afford and reduce it by that amount, you’ve got your new budget for a home. An excellent scenario from an October 17th Globe and Mail article illustrates a real-life example perfectly:
“A family qualifies for a 3.09% mortgage. That rate, plus 2 percentage points is higher than the Bank of Canada’s 4.89% five-year benchmark. The family would then be vetted using a 5.09% rate.
Under the current rules, they would be able to buy a home worth $706,692 with a 20% down payment. With the new guidelines, they would be able to afford a home worth $559,896.”
What will happen to the market overall?
The prediction is that luxury priced properties will see the least amount of change, while properties priced under $1 million will see more of a change. Since houses are generally more expensive than condos (for the most part), we can expect to see an increase in demand for larger condos and condos that can act as a family house alternative. Condo developers are already being encouraged to incorporate family-friendly amenities and layouts into their projects, so either way, we’re destined to see a shift in how the “family” norm for housing is defined.
Do you want to connect with our kick-ass in-house mortgage broker to see how these changes will affect your borrowing power? Click here to get in touch!