Canada's Condominium Magazine

New mortgage rules could strip buyers of 25% of their buying power and targets uninsured mortgages

With Ontario Fair Housing Plan rules already impacting the Toronto market, putting some prospective buyers in “wait and see” mode, new mortgage rules could further test the market’s resilience.The “Nanny” provisions — which will make it more difficult to borrow, with the goal of “protecting” people from themselves — will reduce the amount of the mortgage a buyer can carry.

According to projections, under the new rules, the median family in Canada would need a 44.29% downpayment — they would only qualify to borrow $335,626 versus the current $452,468… “In Toronto, the median household makes $78,373, and the benchmark price is currently $755,400. They can currently borrow about $526,492 under current rules, which drops to $390,535 under a stress test. Currently, a median household needs a downpayment of $228,908 to get a benchmark home. This would balloon to $364,865 under stress testing.” [1]

In Toronto, typically, this would make condominiums one of the most affordable options in this scenario, since a median-income person — unless they had substantial savings — could not afford a detached home with only a $390,535 mortgage.

The Federal “Nanny” provisions — which will make it more difficult to borrow, with the goal of “protecting” people from themselves — will reduce the amount of the mortgage a buyer can carry.

 

After new draft rules scenario according to Better Dwelling projections: after new guideline rules pass, the number of people who can buy “uninsured” will drop. On a per-area basis (Census), the red indicates those who “cannot” based on the new rules, the blue those who “can” based on median income for those areas.

 

Although the fall market shows signs of recovery from the government’s attempt at cooling the markets, the new draft guidelines of The Office of the Superintendent of Financial Institutes may go one step too far for many people who want to own their own home.

As with all government intervention, there are pros and cons — protection from financial risk versus freedom to buy — but it’s mostly not good news for first-time buyers.

 

Based on the same regions and incomes, with the OLD rules, the blue areas indicate areas where — based on median incomes — people can current carry uninsured mortgages. Notice, the significantly smaller amount of “red” on the map.

 

A rule for the rich?

The new rules are fairly neutral for affluent and wealthy home-owners. Where it hits is people struggling to get into the home market so they can pursue the time-honoured Canadian tradition of building equity in a family home. New rules will basically remove up to 25% of buying power overall by tweaking rules.

Awareness of the pending changes, now in draft form, may push some people “on the fence” back into the market before the rules are passed — a potential short-term surge? After they pass, of course, the market will take another blow from regulators, although clearly, Toronto has shown more than enough lasting-power to crest this new barrier.

Uninsured mortgages impacted

Most controversial — and probably not well thought out — is a move to go after uninsured mortgage holders. Uninsured mortgage holders tend to be more stable and have more capital since they currently must have 20% minimum downpayment. The draft guidelines propose making it more difficult for banks to approve these mortgages — typically thought of as low risk — by requiring them to calculate risk based on a mortgage rate 2% higher than current. In the past, this type of risk assessment was applied to insured borrowers only.

The draft guidelines propose making it more difficult for banks to approve these mortgages — typically thought of as low risk — by requiring them to calculate risk based on a mortgage rate 2% higher than current. In the past, this type of risk assessment was applied to insured borrowers only.

The biggest fear, from lenders, is that it will push buyers into insured mortgages — which cost an extra 5 percent.

How does it impact buyers?

Right now, typical homes in Toronto average $750,000 (rounded from TREB numbers). Better Dwelling has a video visualizing the changes for conventional mortgage borrowing “against median household income” by Toronto Census tracts. (The blue on the map are those that CAN borrow conventionally.). In this time-lapse video, you can see how the new rules will change Toronto:

 


NOTES:

[1] Better Dwelling>>

 

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