New mortgage rules have been making the headlines recently, and we’ve had a lot of questions from past and future clients asking how these rules will change their home value and investments. Lets first look at what has changed, and then how this might impact your home’s value.
- Mortgage applicants will have to qualify at a higher rate. This month, the Mortgage Qualifying Rate (MQR) will be applied to ALL loan applicants - it used to be applied to only high-ratio loans. Even if the loan rate is 2.29% (current 5 year fixed rates), any Government insured mortgage will require that you qualify for the loan at a higher rate (currently 4.64%). This ensures that the applicant will be able to carry their mortgage in a higher interest rate environment. Effectively, this new rule will mean that the average applicant will qualify for a smaller mortgage amount than before, or will have a higher rate because they will need insurance that isn’t effectively backed by the Government.
- The Government will no longer insure low-ratio mortgages for refinancing, rental, properties over $1m, 35 year amortizations…the list goes on. Low ratio mortgages (those with 20% or more equity in their home) used to have more lenient rules than high ratio mortgages for obtaining portfolio insurance. Because these mortgages will not qualify for Government back-stopped portfolio insurance, the cost to insure these mortgages will increase. That cost will be passed on to the consumer as increased interest rates.
What do these changes mean to the average home buyer in Toronto? Well, for most purchasers, it will likely mean that they will either qualify for a smaller mortgage amount, be paying a higher mortgage interest rate, or both. Then again, there are many lenders today that will waive the additional interest rate and insure the mortgage themselves. If that stops tomorrow, would a potential buyer be discouraged from purchasing a home by a 2.59% versus a 2.39% mortgage? In my opinion, the difference is so small that the answer is no – on a $1 million mortgage, that would amount to an extra $100 per month. That isn’t a market-breaking change.
So, why are so many real estate insiders shouting so loudly about these changes? We believe that these changes are good and will help the market in the long term; they protect the consumer and the bank by qualifying at a higher rate, and protect the taxpayer by moving some of the risk of mortgage insurance away from the public purse. For our clients that actually live in their houses, we think that these are great changes. While fairly insignificant, they do help to put a bit of a break on a rampant market. A 20% rise in Toronto's real estate prices is unsustainable, and no market is immune to corrections. For our clients that invest in residential real estate, we’ve already spoken about this market and what the risks are. We're all for these changes, and believe they will lead to a healthier market in the long term.