Navigating the Changing Mortgage Market
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A Look at Canadian Mortgage Trends, Products, and Borrowing Guidelines
Today, the Canadian mortgage market has been the subject of much speculation. But recent developments in the market and announcements from the federal government and Bank of Canada have helped borrowers find the products they need.
While there are some new challenges when it comes to choosing and finding a mortgage product, such as the mortgage interest stress test, a mortgage broker can help you when it comes to navigating the market.
Recent Changes to Canada’s Mortgage Market
Bank of Canada Overnight Rate Remains Steady
Due to global economic concerns, the Bank of Canada has maintained its overnight rate at 1.75%. Since this overnight rate remains steady, mortgage rates also remain steady and aren’t expected to increase until the end of 2019 or early 2020.
First-Time Home Buyer Incentive
To help first-time home buyers, the Canadian government announced shared-equity mortgages to provide interest-free loans from Canada Mortgage and Housing Corporation (CMHC). This incentive is meant to increase the supply of affordable housing since new homes now qualify for more CMHC aid.
A shared-equity mortgage means the mortgage risk is shared between the borrower and the lender, and the CMHC will have equity in the home, sharing future gains or losses. The borrower would have to pay back the CMHC’s equity stake—either when they sell their home, or earlier if they wish.
To help reduce the mortgage loan for first-time home buyers, the CMHC will contribute 10 percent of the value of a newly built home and five percent for an existing home. So, for example, if the CMHC contributes 10% for the down payment on a $500,000 house, which comes to $50,000, and the value of your home doubles when you’re ready to sell, then you will owe the CMHC $100,000.
The same applies if the value of your home decreases. You will ultimately owe the CMHC 10% of the value of your home when you sell, whether the value goes up or down.
It is almost like an interest-free loan that borrowers don’t have to pay back until years later. To qualify, you must have a five percent down payment and an income of less than $120,000 per year. However, the mortgage value and the CMHC loan cannot be more than four times your annual income.
The maximum eligible home price ranges from $505,000 to $580,000 depending on the down payment and whether it’s a new or existing home.
It is important to note that this program is set to launch in September 2019, and as of right now, there are still a few unanswered questions regarding this first-time home buyer incentive.
Greater Stability in Housing Markets
The stricter mortgage criteria, including the mortgage interest-rate stress tests, have helped improve the quality of loans and stabilize the housing market, slowing down the speculative increase in house prices in Toronto and Vancouver.
Tighter Mortgage Criteria
Recent mortgage changes include the introduction of the mortgage interest stress test. With these mortgage changes, the income required to qualify for a mortgage has increased by about 20%. It also affects those who want to borrow money against their homes or switch to a different lender for a better rate.
This means that some buyers who don’t meet the income requirements will need to save more money for a down payment. Or they can buy a less expensive home since they will only qualify to borrow less money than before the changes came into effect.
Another way to increase your borrowing power is by adding a co-applicant or co-signer to your mortgage application. This is typically a parent or another immediate family member such as a sibling.
Understanding the Mortgage Stress Test
The mortgage stress test determines whether borrowers can afford their monthly mortgage payments if interest rates increase.
Borrowers must now be able to afford a mortgage loan if the interest rates increase to the Bank of Canada’s posted 5-year fixed rate—which is currently 5.19%. So even if they get approved for a lower mortgage rate, they must also still qualify for the 5.19% rate as a precaution.
This test ensures that home buyers won’t be stuck with mortgage payments they can’t afford. And it protects the lenders from the risk of borrowers defaulting on their loans. The overall goal of the stress test is to reduce consumer debt and to also cool down the hot real estate markets in Vancouver and Toronto.
Borrowers who take out loans that are more than 4.5 times their annual income are especially vulnerable if interest rates go up or if they experience a loss of income. So, the mortgage stress test is in place to reduce the loan-to-income ratio and the vulnerability of those with lower incomes.
Whether you are a first-time home buyer, or you are looking to switch lenders for a better interest rate, you will need to qualify for this test when applying for a new mortgage loan from a Canadian financial institution. However, if you have more than 20% equity in your home, some credit unions do not have to abide by the stress test rule. The reason for this is because they are provincially regulated rather than federally regulated. Similarly, private mortgage loans do not have to respect the stress test policy either.
Will Bad Credit Affect Your Mortgage Application?
If you have bad credit, you will have trouble securing a mortgage from most lenders. But you still have options. A mortgage broker can help you find the best option for your financial situation.
Maybe you can qualify for a private mortgage, or maybe you’ll need to build up your credit and save more for a down payment.
To determine whether you can qualify for a mortgage with bad credit, consult with a mortgage broker for help and resources.
When Will Rates Go Up? Go Down?
Mortgage interest rates are primarily impacted by global economics along with the United States’ rates, so when the Bank of Canada is uncertain about economic growth, it will keep interest rates steady.
Currently, the Bank of Canada is concerned about the energy sector and the weaker than expected housing market, which is why it hasn’t increased its overnight rate.
Canada also has an annualized cycle where rates tend to get marginally more competitive in the spring and rise in the fall.
Working with a Broker to Get Your Home Financing
Your mortgage broker can help you navigate these rule changes, compare mortgage products, and find a mortgage that is best for you. For example, you may wish to choose a longer amortization period to qualify for a larger mortgage. You may choose to add a guarantor or an applicant to a mortgage who can contribute some income. Or you may opt to source rental income from the property or other properties you may own.
The bottom line is, you have options – and a mortgage broker will help you navigate the market and its mortgage trends so you can find the right mortgage for you.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.