First National Financial LP

Mortgage rule change hits first-time buyers the hardest

  • First National Financial LP

A change in mortgage rules made by the federal government last October has made buying a home a bit trickier, according to mortgage experts.

Responding to concerns about rising housing prices in major metropolitan markets like Vancouver and Toronto, the finance ministry announced that borrowers would be required to take a mortgage rate stress test.

Prior to the changes, buyers with less than a 20 percent down payment were required to pass the stress test and secure mortgage insurance backed by the federal government. However, today all home buyers seeking an insured mortgage will be subject to the stress test, regardless of the amount of their down payment.

Paul Taylor, president and CEO of Mortgage Professionals Canada, said what that means for the majority of Canadians entering into a five-year fixed term mortgage rate at the current 2.59 percent, is they will need to qualify for the Bank of Canada's rate of 4.64 percent instead.

This has resulted in a 20 percent reduction in purchasing power, on average, for first-time home buyers, because they need to qualify for a theoretical higher interest rate.

“By virtue of these mortgage rules requiring more stringent qualifications it's made it much more difficult for first-time home buyers to get into the market because their purchasing power is reduced,” said Mr. Taylor.

The move was intended to ensure that the housing market could weather the storm of an interest rate spike between the time of the home purchase and the time when buyers would need to renew or refinance their mortgage.

With the new stress test now required for all insured mortgages, Mr. Taylor said many first-time home buyers will now have to determine whether to wait longer and save more for a down payment, or continue to rent and stay out of the market.

That can be a problem for the Canadian economy as whole, according to Mr. Taylor, who said removing a segment of potential buyers from the market has resulted in price depreciation in some areas of the country.

And while it may sound like cheaper homes is an opportunity for home buyers, the effect isn't being felt in the regions the federal government intended, Vancouver and Toronto, where the demand consistently outstrips supply.

Home values outside those markets tend to be quite stable with low year-over-year price increases that reflect the overall inflationary rate.

“That's a good, healthy marketplace,” said Mr. Taylor. “But when you remove a chunk of consumers from the marketplace because they can't buy the home that they wanted then you start to have an oversupply. And that always means downward pressure on pricing applies.”

The federal government has also made changes to mortgage insurance eligibility, which has increased the costs of providing mortgages to consumers because interest rates need to rise to secure riskier loans.

Mr. Taylor said it's difficult to say how these federal rule changes have affected individuals since each consumer's financial details are different, meaning their credit history will affect what interest rates and loan limit they can calculate for their mortgage. That's why it's best to consult a professional independent mortgage broker, who can explain not just these rules, but variable interest rates, cancellation provisions, refinancing charges, and a host of other issues that can be difficult to navigate for the average home buyer.

“A broker can really simplify the majority of the terms for consumers and not just provide them with the best interest rate, but also explain the terms of the mortgage,” said Mr. Taylor.

Mortgage brokers can simplify the challenges of securing a mortgage, all the while helping buyers understand the many rules associated with the entire process.

This content was produced by The Globe and Mail's Globe Edge Content Studio, in consultation with First National. The Globe's editorial department was not involved in its creation.