Stand up and take notice: it just got harder to get a mortgage. Again.
With the federal government on a seemingly never-ending quest to slow down Canada’s housing market, another round of changes came into effect last week (though the media has been surprisingly quiet about it). If it wasn’t enough of a challenge for the real estate markets to absorb the reduction to a 25 year amortization that happened in June, the new government regulations (B-20) are making it harder for Canadians to get mortgages. Here’s what B-20 means for you:
1. First, the biggie. It just got a lot harder for a self-employed person to get a mortgage. All of the big banks must now require greater proof of income and – this is the really big news – you likely need a 35% downpayment. Ouch. This one hurts (heck I’m self-employed too). There may be other lenders (e.g. credit unions) who can still qualify self-employed people for mortgages with less than 35% down, but expect higher interest rates and/or different terms.
2. You may qualify for a lower mortgage amount. If you’re looking for a variable-rate mortgage of less than 5 years, the banks now have to use a higher qualifying rate (the greater of the Bank of Canada qualifying rate (currently 5.24%) or the contract rate, for conventional mortgages (20% down or more) and insured mortgages (less than 20% down). What does this mean? Most people will qualify for less, meaning your price range may have just gone down.
3. Cash-back Incentives cannot be applied to a downpayment. Some lenders have been offering cash-back incentives, which helped first-time buyers meet downpayment requirements. To be honest, if you can’t save 5% + closing costs, you should probably wait to buy a house or condo anyways.
4. It’s harder to qualify for a mortgage. When banks determine how much house or condo someone can afford, they take into account some of the recurring expenses of home ownership, such as heating and condo fees. While most have generally applied a $75/month rate for heating, they are now required to estimate that cost based on the size of the house. Some banks are also factoring in 100% of the condo fees (as opposed to 50% which they’ve been using for a long time). All this of course means that the math they perform to see how much mortgage someone can afford will now result in lower amounts.
Are these mortgage changes bad news? Yes and no. I’ve always been a fan of our government getting involved to prevent a US-style crash, but it’s starting to feel like too many changes too fast.
What should you do? If you got pre-qualified a while ago, talk to your bank or lender again and ask them how B-2o has affected how much you can afford. If you’re self-employed and want a mortgage, you’ll need to get more creative and likely deal with a bank other than the Big Six (and definitely forego that latte). If you’re a Seller, recognize that these changes will impact the real estate market and you aren’t really in a power position anymore. More on that tomorrow.
(If you want to talk to someone about financing a home or condo, we have some great partners and would be happy to pass along their contact information.)