Some of you may have heard that yesterday, Ottawa unveiled a major initiative to slow down housing market. There are a few changes and I will provide more detail on it. For now, I want to highlight one of the changes that is coming into effect October 17th, 2016, that will likely have the biggest effect on the market. It is referred to as a “Stress Test” and is designed to ensure Canadians can still afford their mortgage payments, should the rates increase.
Every time we apply for a mortgage we go through an income qualification process. This process uses the ratio of household income in relation to debt. The debt portion of this ratio uses expenses associated with owning a property. Until now, the mortgage expense on 5-year, fixed mortgages used a rate that was offered to you in the contract. This rate is in the range of 2.29% to 2.79%. Variable rate mortgages, as well as mortgages on shorter terms used a Bank of Canada posted rate. As of September 28, 2016, the Bank of Canada posted rate was 4.64%. The new change will require qualification for all mortgages with less than 20% down payment to be done using the higher of, Bank of Canada posted rate or the contract rate. Here is an example of how it effects the qualification:
Scenario: A person with an annual income of $60,000, no other debt, 5% down payment and an estimated property tax of 1%.
- Now will qualify for approximately $370,000 property.
- As of October 17th, 2016, the same person would only qualify for about $300,000 property.
- Or, the same person would need approximately $73,000 annual income to qualify for the original $370,000
It should be fairly easy to understand how this will affect the market. The affordable price of a property will now see a significant decrease. The example above is on a fairly low-valued property. The affects will be noticeably more significant on the properties over $500,000.
The other changes coming into effect are targeted more towards foreign investors and I will have a separate article that will cover all major items.