Changes To Insured Mortgage Guidelines And Their Impact

The housing market continued to pick up steam in early 2017 as numbers climbed to record highs. While the industry adapts to the changing environment, and the government tries to cool the market in large urban areas like Vancouver and Toronto, we on the front lines see the effects these changes have on home buyers looking to make one of the most important purchases of their lives. The government in particular made some strategic changes last year to try and offset some risk and cool the market. One of the major concerns they tried to address was the low interest rates Canadians have benefited from, and the impact that possible rate increases may have to homeowners. These changes make sense on paper but how do they play out when put to practice?

I am going to focus on another effect these changes have had, and paint a picture of what I have seen with my own clients and colleagues. The two major changes that have contributed to this are the stress test required to calculate mortgage payments to qualify a mortgage, and the reduction of the maximum amortization from 30 to 25 years. What does this mean? For anyone currently looking to purchase a home with less than 20% as a down payment, the banks are required to qualify you at a higher payment than you would pay based on the higher stress rate, to a maximum amortization of 25 years. The effect of these changes reduces a potential home buyer’s buying power as the banks are required to work within a strict ratio between your housing costs, debts and income. Let's look at a quick example with two scenarios (insured and non-insured) where an individual makes the same yearly income in both, but the down payment differs:

**Note: The above chart is for example purposes only.

As you can see, these changes have reduced the buying power of the general home buying population with a down payment less than 20%. From our example we can see that the same household earning $100,000 yearly can obtain a mortgage for $475,000 under insured guidelines versus $648,000 under non-insured guidelines with 20% or more down. If the intent of the guidelines for insured mortgages is to ensure clients can afford the monthly payments should rates increase in the future, why then is that same client able to obtain more if they put 20% down or more ($475,000 vs. $648,000)? Shouldn't that same household be able to afford the same mortgage amount since their ability to pay doesn't change as they still earn the same yearly income? These are questions I have been asked over and over by my clients who have had a hard time understanding why they qualify for different amounts simply because their mortgage is insured or non-insured. Many of these clients are having a hard time buying a home under insured mortgage guidelines and what they state they can afford. It's clear then that the government has built in a buffer to ensure all mortgages that are insured allow for increases in rates in order to reduce the impact to home owners should rates increase to a certain level. But are these changes really helping protect home buyers or simply creating another problem?

As home values continue to increase and the average household income stays the same, it's becoming increasingly difficult for families with down payments under 20% to get into the market. What I have experienced in recent months is that the general public is still looking to buy and wants to get into that home but they just can't get approved because of these guidelines. What we are seeing is families with down payments that are less than 20% being forced out of certain housing types because the average price is greater than the amount they qualify for. This trend has seen many home buyers having to put down more than 20%, seek alternative options, or readjust and downsize their purchase to a semi- detached or even a condo versus a detached home. While these changes have reduced the mortgage amount families can qualify for to provide some security against potentially increasing rates, it's clear that many families would be impacted differently if mortgage rates were to increase. This is why it has become more important than ever to work with an experienced Mortgage Agent that you can trust will discuss all your options, listen to your needs, and work with you on a plan to secure the financing you need to buy your most important purchase, your home!

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