I don’t think anyone disputes that the Toronto and Vancouver real estate markets have been crazy these past few years and there’s a lot of speculation about government intervention to slow things down to a more manageable pace. Today, we’re sharing with you what we’ve been hearing and what you can do about it if you’re a Toronto Buyer or Seller.
Rumours We’ve Heard Lately:
- There is potentially going to be a new rule increasing the minimum downpayment to 10% (currently, the minimum down payment is 5% for properties under $500K, with a graduated scale up to 20% for properties selling for $1 million or more). Rumour has it that this might only apply to properties in Toronto and Vancouver, thus preventing catastrophic market slow-downs in smaller communities with lower price points. A minimum 10% downpayment would disproportionately hurt first time buyers…and in my opinion, first-time buyers aren’t the fuel to Toronto’s real estate market, so will this really fix the problem?
- We’ve also heard that a new 10% minimum downpayment might only apply to non-first-time buyers. That feels more fair to me, though in our team’s experience, most non-first time buyers already have down payments greater than 10%, so not sure this will impact the market much either.
- The most concerning rumour we’re hearing is that the government may make it harder for buyers to get a mortgage, by changing how lenders qualify a buyer. Currently, lenders decide how much someone can afford based on an applicant’s income, credit history, assets and liabilities and they can use either the 5-year fixed mortgage rate or a discounted rate to determine how much mortgage payment someone can afford. Word on the street is that they soon may be required to qualify Buyers based on the posted rate, which as of writing is 4.64%. We reached out to mortgage broker Mortgage Jake to do a little math for us. He ran the numbers for a couple making $120K a year in income, with a 10% downpayment and $3,000 in annual property taxes.
Under curernt rules, Jake’s imaginary Buyers could qualify for a mortgage in one of two ways:
- Using a 5-year posted rate (as of writing. 4.64%) – qualifying them for $610,000 (approx)
- Using the 5-year fixed discounted rate (2.49% typical as of writing) – they would qualify for $760,000 (approx)
- If the rules change and Buyers are required to qualify under the 5-year posted rate, that means they would only ever qualify for $610,000 – a pretty significant difference. This kind of change to mortgage rules would impact almost all Buyers.
- Taxation on foreign buyers – In August, Vancouver decided to tax non-residents 15% of the purchase price on closing (so $300K on a $2 million purchase). Undoubtedly, it was effective at slowing down the market – overnight – but many of those buyers have just moved on to Toronto. Nobody knows the true level of foreign money invested in real estate in Toronto, so any moves to slow it down would be happening in a vacuum of information (never the best way to make a decision). I’d like to think that Toronto/Ontario won’t make the same rash decision that Vancouver made – or at least they’d implement it better. But the likelihood of something happening to slow down foreign money is real.
- We’ve heard that change is coming November 1st – that rumour has been pretty consistent.
So what do you do as a Toronto Buyer or Seller?
I think there’s little debate that government intervention is on the way, it’s just a matter of when, how much and how. While we’d never recommend basing important financial decisions on rumours, there are a few categories of Buyers and Sellers who might want to re-consider their approach to buying and selling:
- If you’re a Buyer, and you have a 5% downpayment, make sure you get pre-approved for a mortgage ASAP. You might want to consider speeding up your search.
- If you’re a Seller with a home in area that’s popular with non-residents, you may want to consider putting your home on the market sooner rather than later (we can help with that!)
- If you’re a Seller and selling your home to a non-resident Buyer, make sure your agent is asking LOTS of questions. If the rules suddenly change (like they did in Vancouver), will the Buyer still be able to close on your home? This is when hiring an experienced listing agent matters.
- If you’re a Buyer looking to buy at the top end of the price range, your lender has given you, get on that search ASAP. If qualification rules change and you now qualify for $150K less than you do today, that might mean the difference between buying a house and buying a condo.
Questions? Need help? Don’t be afraid to reach out.