BRIAN'S BLOG
Major Changes to Mortgage Regulations Coming Soon
October 31, 2017
News about upcoming changes to mortgage regulations has been hard to escape over the past several weeks. If you need a recap, click here.
The biggest change is that buyers who have a down payment higher than 20% will now have to undergo a stress test to see if they could afford their mortgage payments if interest rates go up. This will definitely apply when they’re applying for a new mortgage and could even apply to those switching lenders at the end of their term.
This change isn’t all that unreasonable – a buyer’s finances will be tested to see if they could still afford their mortgage payments if/when interest rates go up. Its a safe and smart thing to know. This will mostly affect first-time buyers who are maxing out their budget. They’ll find that they’ll be approved for less than they’re hoping.
If the interpretation is that the rule applies to homeowners switching lenders, hopefully the homeowners are earning more money and have built more equity into the house which will mean that they will have no problem with the stress test.
The big question is – how will this affect the market, if at all. When changes are announced, the market usually slows down until people see what is happening. We’ve seen this time and again, most recently this spring after the Fair Housing Act was announced.
Depending on who you speak with, some feel there seems to be a lull in the market right now but watching the sales being recorded on MLS in certain sectors and neighbourhoods, the proposed changes aren’t affecting prices at all. There are new listings, but not as many as one would expect for the fall market ,so because of low inventory demand is remaining high and prices are climbing.
The announcement that the new rules take effect on January 1 could lead to a potentially large number of buyers coming to market and wanting to close before the end of the year as well as sellers rushing their homes to market anticipating a price drop. However, it takes time for a home to be prepared for sale. Sometimes it’s just not practical.
Even without a glut of new buyers, there is still competition out there, especially for condos in the 400K-600K range and homes in certain neighbourhoods, which continues to push prices up.
After January 1, first time buyers who can’t afford the home they want will continue to rent and save towards their down payment. The vacancy rate in Toronto according to the Canada Mortgage and Housing Corporation is 1.4%. A healthy vacancy rate is about 3%.
What does this mean? It’s a great time to buy an investment property if you’re willing and able to hold onto it long term. According to a study from the Ryerson City Building Institute, Toronto needs 8000 purpose built rental units per year over the next ten years to get the vacancy rate back to where it should be.
How likely is this to happen? Very unlikely, especially now that rent controls for condo buildings are in effect and it’s not as attractive for developers or property management companies to own new buildings where they can’t increase the rent except for the legally allowed percentage. If you have the down payment necessary and with the average rent for a one bedroom condo being around $2000, according to the Toronto real estate board, your costs would be covered and rents are only going up.
I’ve recently assisted quite a few investors with buying a second property for the purposes of growing their real estate portfolio since the rental market is so strong. If you have questions about buying an investment property feel free to contact me and I can help you with the ins and outs of investing.
In the end, I suspect that the spring market is going to be busy again and I don’t anticipate a downturn in terms of prices. The mortgage regulations may result in a lower activity level, but it’s also going to just perpetuate the low inventory issues that we’ve had for the last couple of years.
Buyers may be able to afford less, but they can still afford something.
If you have any questions about the new mortgage regulations, the Toronto real estate market or investment properties, please get in touch!