Today’s unprecedented low lending rates have Canadians wondering what will happen when interest rates rise. Among them is Minister of Finance Bill Morneau, who earlier this week announced changes to Canada’s mortgage rules to reduce the risk of a housing market crash.
Under the new mortgage rules, which take effect on Oct. 17, all new insured mortgages must qualify for the amount at a rate of 4.64 per cent, which is an average of the big banks’ current posted mortgage rates. This is the case even if the rate offered by your lender is lower. Mortgage loan insurance, offered by companies like Canada Mortgage and Housing Corp. and Genworth Canada, is required by lenders when the down payment is less than 20 per cent of the purchase price, to protect lenders against default.
This, all in an effort to shield highly indebted Canadians from spending more than they can afford in a more realistic rate environment.
“Today’s announcement by the Minister of Finance demonstrates that housing and the housing finance system remains a top priority for the Government,” said Stuart Levings, president and CEO of Genworth Canada, one of the companies offering mortgage default insurance in Canada. “As a key stakeholder, we remain committed to responsible lending practices, while helping first-time homebuyers achieve the dream of homeownership.”
According to Rate Hub, a Canadian financial comparison platform, a family with an annual income of $100,000, property tax of $400 a month and heating costs of $150 a month, with a down payment of $40,000 at a mortgage rate of 2.17 per cent, currently can afford a home worth $665,435.
Under the new mortgage rules and the higher threshold of 4.64 per cent, the maximum they can spend is $505,762 – a difference of $159,673.
Based on 2016 data, Genworth Canada estimates that approximately one-third of insured mortgages – predominantly taken out by first-time homebuyers – would not meet the new requirement.
“Canadians have told us they are concerned about growing household debt and rapidly rising house prices in some of our biggest cities, particularly in markets like Toronto and Vancouver,” Morneau said in a press release. “These concerns have grown over many years, and there are no quick fixes. The federal government plays an important role in ensuring that housing markets are stable and function efficiently. My colleagues and I are committed to continuing to work with provinces and municipalities to address the concerns of middle class families, and to ensure Canada’s housing markets and financial system remain strong, stable and resilient well into the future.”
Meanwhile, some expect an influx of new mortgage pre-approvals and applications before the new mortgage rules kick in later this month. Before you sign on the dotted line, ask yourself, “Should I bite off more than I can chew?”
While this new benchmark for lending qualification targets insured mortgages, it’s a good idea for all borrowers to plan ahead for the inevitable. Remember, what goes down must come up (or something to that effect). Interest rates will rise, and when they do, you’d be wise to ensure you can afford your higher mortgage payments.
So, what can you do to insulate yourself from rising rates?
- Stress-test your mortgage against a higher rate before you commit to the purchase of a home, or any big-ticket item for that matter.
- Don’t spend the maximum you can afford. At press time, according to mortgage rate comparison site ratehub.ca, the best five-year fixed rate is a jaw-dropping 2.29 per cent. At this rate, your dream home may be a reality. Ask yourself, will you still be able to afford your mortgage payments at a rate of 4.64 per cent, or more?
- Consider all your expenses. Do you have student loans? Do you drive a car? Do you enjoy dinners out and wintertime travels to the sunny south? Do you have kids, or are you planning to in the future? And don’t forget about your rainy-day fund and your retirement savings!
In the meantime, rather than piling on the debt, take the current low rate environment as your opportunity to pay down your existing debt faster, so when rates do rise, you’ll have a smaller mountain to climb.