How will new mortgage rules affect first-time buyers

If you’re a first-time homebuyer, new mortgage rules may make it more difficult for you to get into the housing market.

As of Oct. 17, all homebuyers who get a high-ratio mortgage (down payment of less than 20 per cent of the purchase price) will now have to undergo a mortgage stress test by qualifying at a rate they don’t currently have to pay. This was something that only buyers getting a high-ratio mortgage with a variable-rate term or a fixed-rate term of less than five years previously had to do. The best mortgage rate in Ontario was 2.29 per cent (as of writing). However, the Bank of Canada’s qualifying rate is 4.64 per cent.

First-time buyers – especially in housing markets where there aren’t many affordable single-family homes available – may be priced out of the market due to the new rules, says Gregory Klump, chief economist of the Canadian Real Estate Association.

Let’s use the example of a couple with a combined income of $100,000 has saved $40,000 for a down payment and they qualify for a mortgage rate of 2.29%. We’ll assume that their monthly property taxes will be $400 and their heating costs will be $150 a month.

When using RateHub’s mortgage affordability calculator, they’ll be able to afford a property costing up to $521,041 because of the new mortgage rules. But under the old rules, they would’ve been able to spend $635,700. That’s a difference of $114,659.

The reason for the rule change is because there have been concerns about rising household debt levels in Canada. The country’s debt-to-income ratio reached 167.6 per cent in the second quarter of this year, according to Statistics Canada. What that means is households have $1.68 in debt for every dollar of disposable income. One government report noted that the country has recently experienced the largest increase in household debt relative to income since 2000.

There were also other rules announced that come into effect on Nov. 30 that may affect smaller mortgage lenders – the ones that often cater to first-time buyers. Those lenders will no longer be able to buy portfolio insurance for certain types of mortgages they sell to investors. (Note that this is different than mortgage insurance and not something consumers have to purchase.) The smaller lenders won’t be able to sell those insured mortgages for funding. As a result, they won’t be able to issue as many mortgages and will likely have to raise rates.

The bottom line:

The rule changes will make it harder for some first-time buyers to get into the housing market. And they may also face higher mortgage rates.

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