Time is ticking faster than usual this week. Why? Because you must have a firm deal on a real estate purchase by OCTOBER 14th in order to qualify at your pre-existing insured-mortgage approval if you are buying with less than 20% down.
After Monday, October 17th? Your buying budget drastically changes….and you might sadly have to re-tailor your home-buying expectations.
You might have heard that the federal government implemented a policy change last week. And while there are a lot of unhappy people affected by it, it’s Canada’s way of ensuring Toronto buyers aren’t over-leveraged and can handle a future increase on interest rates.
Mortgage Qualification Policy Change: Currently, if you select a 5-year fixed mortgage term, you would qualify based on your actual monthly mortgage payment (i.e., calculated on 5-year fixed rates in the low to mid 2% range). Going forward, while your actual mortgage payment would still be based on your contract rate, you would need to qualify using a much higher monthly mortgage payment based on the Bank of Canada “stress-test” Benchmark Rate (currently 4.64%) — resulting in a significantly reduced maximum purchase price (refer to impact section below).
Implementation Dates: October 17th for all those with less than 20% down. The change may also impact those with greater than 20% down given the banks/lenders use of portfolio insurance. If that is indeed the case, it is expected that change may be implemented on November 30th.
Impact: It substantially reduces the size of the loan a buyer with a small downpayment would qualify for. While every case is different, I have included a sample max purchase price impact calculation for a 10% down buyer, c/o The Lang Team. Please contact them or I or another reputable mortgage professional if you would like the numbers run for your specific scenario:
Impact Example (Max Affordability):
Total household salaried income = $120,000
Down payment available = 10%
Mortgage Product Chosen = 5-year Fixed
Purchase Style / Location = Freehold / Toronto
Debts = limited debts (i.e., credit card, car, etc.)
Current Max Purchase Price = Approx. $800,000*
Max Purchase Price After Oct 17th = Approx. $640,000*
*the above is for illustration only
Will this policy change drastically change the behaviour of the Toronto Real Estate market? We believe it will weed out a lot of buyers, but at the same time, heat up the $300K-$700K condo buying range and the $700K-$900K freehold buying range. While we could see some evening off of the record-breaking appreciation trends from this year to next, we do not foresee house and condo prices going down as a result (certainly not with real estate appreciation being the single best investment you can make right now.) Case in point: the average price for a detached house in Toronto was $1.3 million last month, up 23% from September 2015. What we do expect is for buyers with less than 20% down to very quickly tailor expectations with their new budgets. It is not a matter of if you will get priced out of the Toronto real estate market, but now, when you will get priced out. For a lot of you, that date is closing in sooner than you realize.
If you need to get pre-approved or re-pre-approved, please contact Karyn for a reputable mortgage broker or bank lender name. If you have questions about affordability, what the best use of your real estate dollars is or what impact the new policy means if you have 20% or more down, please contact Karyn directly.