New Stress Test Rules - The ACTUAL Impact
New Stress Test Rules - The ACTUAL Impact
I have heard the "sky is falling" all week over the newly announced mortgage stress test rules that will come into effect in Canada January 1, 2018. Yes there will be buyers negatively affected by the new rules but is it doom and gloom and the entire market is going to collapse?!?! NO. Here is the actual impact:
If you are renewing an existing mortgage the new rules do not apply to you. You can simply renew your mortgage without having the re-qualify under the new rules. If you want to refinance you will be affected and will have to qualify under the new rules. I have had clients (practically in tears) call me in an absolute panic as their mortgage is up for renewal next year and they're worried they won't qualify under the new rules, the bank will not renew their mortgage and the bank will foreclosure on them. That is not going to happen. Contrary to popular belief, banks do NOT want to foreclose on their clients. If you are able to make your monthly mortgage payments, banks are happy. When banks have to foreclose on a borrower, the banks incur legal costs, they are not getting monthly payments and the property usually sells below fair market value which = lose/lose. The banks and the government of Canada do not want that. These rules are coming into effect because interest rates will be going up in the near future. I repeat INTEREST RATES WILL GO UP! The government wants to make sure if you take out a mortgage today, when it comes time to renew your mortgage in several years you will still be able to make your monthly mortgage payments at the interest rate available at that time. They do not want to see you foreclosed on.
If you are a current homeowner with more than 20% equity and you want to access that equity you will have to qualify under new stress test rates. This will affect roughly 5% of all homeowners but there are still options and ways to get around this if you have co-signors or use alternative lenders, etc.
The new rules will affect buyers with 20%+ down payment who specifically planned on borrowing more than 80% of what they currently qualify for.
The larger cities with higher than average household incomes will not see a significant impact. Experts are estimating small towns could see as much as a 10% drop in values (that is the MAX not the average expected). Kelowna has significant job growth. Kelowna, with a population of 192,882, is considered a large city. Small towns would be places like Sicamous and Princeton, both with populations under 3,000. Kelowna is the 3rd largest city in British Columbia only behind Vancouver and Victoria.
The new rules are slated to go into effect January 1, 2018. If you are in the small percentage of the population that will be affected by these rules, you are planning to purchase a property in a LARGE CITY and are planning on spending the maximum amount you qualify for, you would be wise to purchase prior to January 1, 2018. If you are not sure if the new rules will affect you and you are looking to purchase, then I recommend you go speak with your mortgage specialist now and find out! It is that simple.
If you are not affected and are looking to buy in a small town, you might be better off waiting to purchase until after the new rules come into effect as you will be hoping the town you are buying in will see the estimated maximum 10% decrease in property values. If you are affected and want to buy in a small town you are going to need to do some deep thinking. The new rules will reduce your buying power by approx 20% but prices could come down as much as 10%. Say you can afford $500,000 now. In January you can afford only $400,000. If you buy a house for $500,000 now in a small town, in the new year it could be worth as little as $450,000. Even with the 10% drop in value you still wouldn't qualify to buy that house in the new year. If that $500,000 house is your dream house then you would want to go for it now while it is still within your reach. If it's not your dream house you can always wait for the not quite as nice $440,000 house to drop 10% to $400,000 and then you can afford that house.
I constantly have clients asking me what they should do. My answer is always the same: it depends! You need to sit down, crunch the numbers and decide what is best for your personal needs. I rarely see clients spend the maximum they are approved for. I had a client approved for $1M. She purchased a $600,000 home and LOVED it because that is what she wanted. If you are someone who likes to go out for dinner every night, you have to have all the latest gadgets, etc. then you are someone who will not be happy house poor. You're going to want to buy something less expensive so your property does not eat up a considerable amount of your disposable income.
Real estate is the number one wealth builder consistently over time PERIOD! I am a firm believer in owning real estate. If you had put $600 under your mattress in 1960 in Vancouver you would have $600 today. If you have used that $600 as a down payment on a house in Vancouver in 1960 (yes, you could buy a house for $600 down in 1960) that house would now be worth over $1M. Real estate is a hard asset. Real estate is an investment with intrinsic value which makes it an excellent inflation hedge. Hard assets go up in value with inflation while your paper money goes down in value. $600 was a down payment on a house in 1960, now that same $600 won't pay for half a month's rent for a 1 bedroom condo in Vancouver. Your buying power is reduced. I whole heartedly believing in investing in real estate but you need to be smart about it and weigh all your options to ensure you buy what is best for your personal needs.
Lake Okanagan Realty Ltd.
Tel: (250) 870-2792