The new year is upon us, and with it, a whole new real estate reality. Tougher federal mortgage regulations took full effect on Jan. 1, slashing affordability for new borrowers and contributing to slower selling conditions than the record-breaking activity experienced throughout 2017 in Canada’s largest markets.
Dubbed Guideline B-20, this latest parcel of policy changes is also anticipated to be the most impactful, as all new mortgage applicants must undergo a stress test regardless of their down payment size. Under the rules, a buyer paying more than 20 per cent down on their home purchase must prove they can carry their monthly payments at either their contract rate plus two per cent, or at the Bank of Canada’s benchmark rate – whichever is higher.
As Canada’s “big six” lenders hike their five-year posted and prime rates, that criteria benchmark is slated to get steeper, increasing to 5.14 per cent from 4.99 upon news of the Bank of Canada’s January rate hike.
With such flux occurring in the market, many buyers are understandably perplexed, grappling to comprehend how these new rules will translate for their home buying budgets. While it’s always the role of the real estate agent to help clients navigate the market’s nuances, solid guidance is needed more than ever this home buying season.
Here are some of the ways the real estate landscape has changed because of Guideline B-20.
Pre-approvals are more important than ever:
Obtaining a pre-approval has always been a crucial first step before embarking on the home hunting process but receiving one post B-20 will provide much-needed clarity on how the new mortgage rules have impacted buyers’ budgets.
Another reason is that, in today’s rapidly heating interest rate environment, locking into a 60- or 90-day preapproval can offer some peace of mind for buyers while they peruse the perfect listing. To avoid disappointment, ensure your clients have undertaken this part of the process prior to viewing any listings or open houses. Reduced affordability, while challenging for first-timers, may prove to be more of a surprise for move-up clients who anticipated greater leverage on their home equity; should those clients break existing mortgages upon their move, they will also be subjected to stress testing.
There are fewer mortgage options for borrowers who need help:
The introduction of a stress test was only one portion of Guideline B-20; the regulations also ban the practice of “co-lending” or “bundled” mortgages, which combine multiple mortgage loan products to help a borrower satisfy their minimum loan-to-value requirements.
Mike Bricknell, a mortgage broker with CanWise Financial, says that limits options for borrowers who may not satisfy “A” lending requirements.
“For those who don’t fit within the ‘big bank’ criteria, it can be very difficult to obtain this kind of financing, and so bundled loans have been a great asset,” he says. “Restricting this type of loan will reduce these borrowers’ options, sending them instead to the dark ‘private’ loan market, where super-high rates and fees are the norm. In these situations, repayments tend to be interest-only, and can make it even more difficult for those in challenging financial situations to dig themselves back out.”
As well, the “bank of mom and dad”, which was speculated to be artificially propping up hot detached housing demand, could prove less effective than before. In October 2016, when the first round of B-20 implemented stress testing for high-ratio (those paying less than 20 per cent down) borrowers, those fortunate enough to receive down payment gifts from parents that bumped them into the low-ratio category were able to skirt the test altogether.
Under the latest rendition, however, those borrowers will still need to prove they have the income and credit criteria to carry that much house should interest rates rise; while a larger down payment will help their qualification, they may still be pre-approved for a smaller amount than under the old rules.
Buyers may have to downsize their expectations:
The harshest reality of B-20 is that, all things equal, home buyers will qualify for smaller mortgages than they would have last year. For example, they’ll be granted $100,000 less on a typical $500,000 mortgage. For many buyers, that could mean the difference between a one- or two-bedroom condo, forgoing a parking or storage space, or choosing a townhome rather than detached.
For this reason, it is anticipated that the most affordable home types – such as condos – will lead the 2018 market in terms of demand and price growth, as they did for the latter half of 2017, leading to further softening of the detached market. It may also fuel the exodus to suburban markets, as buyers seek greater square footage and land lots for less.