On October 3rd ,Finance Minister Bill Morneau announced changes to the rules for mortgages insured by CMHC. Everyone expected that these changes would address the problems with runaway prices and predatory practices in the Vancouver housing market. What came as a big surprise to many was the other changes announced for October 17th.
The biggest and most profound change was the use of the Bank of Canada benchmark rate to qualify for a 5 year fixed rate mortgage. The 1- 4 year fixed rate and the variable rate mortgage are already qualified at this rate. 5 year fixed and great terms were exempt.
My first thought was why would anyone do this? This will devastate out housing market. First time home buyers would not be able to qualify. I looked at a preapproval I had for a client who is presently looking for his first home. In August, I was able to qualify him for $330,000 . This would allow him to buy a small starter home. When I tried to re-qualify him using the benchmark rate at 4.64% I found the most he could afford would be a $270,000 purchase. This would put starter homes out of range and leave him with a townhome or an apartment. Both of these options tend to be condos so I put the $300 average condo fee into the equation and now all he could afford was a $245,000 condo apartment. This is frustrating considering we are using a fictional rate and not the rate we could lock him into for 5 years.
I thought about this and then I realized that while I know interest rates will go up . When I purchased my first home in 1986 my mortgage interest rate was 9.98%. I was so happy to be paying less than double digits.. I’ve been in this business for over 11 years and I remember in 2010 the best rate I could get clients was 5.79%. While I don’t expect rates to jump into the double digits, 2010 was only 6 years ago and rates could go up to 5.79% within the next 5 years.
I realized that I wasn’t asking myself an important question. Will my client be able to continue making payments in 5 years if mortgage interest rates go up to historical normal levels? I was betting on my clients income going up quite a bit in the next 5 years. As the focus of my business is helping people I started to think that I may be putting people in a bad situation. Perhaps this higher qualification rate is the prudent thing to do.
Another item that did not make headlines was the fact that CMHC would no longer insure mortgages over $1 Million dollars. While there had been a scaling back on insurance over $1 Million, now this is completely gone. As a result, lenders who back end insure such as monoline mortgage companies will now not be able to offer mortgages to these clients. The only place to get a mortgage will be the big banks. I know that from previous experience that when banks do not have to compete they use their bank posted rates. We have seen this with mortgages for mobile homes. I expect the same thing will happen with Million dollar plus mortgages in the future.
As you can see, the changes are a mixed bag, there’s some prudence but also the possibility of higher interest rates in the future. The jury is still out as to whether these are good changes or bad.
Contact me or visit my website for more information on mortgages in Canada.