Unless you’ve been living under a rock, the big news from the real estate market last week were the new mortgage rule. News outlets from BNN to CBC mentioned how the new rules make it tougher for first-time homebuyers, especially in high-priced cities like Toronto and Vancouver. While that may be true, if you’re a first-time homebuyer or looking to move up in the market, you can still buy a home, you just have to be smart about it. Let’s take a closer look at the new rules and why they’re actually a good thing for home-buyers.
A Run Down of the New Mortgage Rules
Anyone buying a home with less than a 20 percent down payment on or after October 17th is affected by the new mortgage rules. Under the old rules, to be approved for a variable rate mortgage or fixed rate mortgage with a term under five years (typically one to four year terms), you have to qualify based on a higher standard.
You may be wondering why the big banks have such high posted rates for mortgages. Mortgage penalties is one reason, but the qualifying rate is another. Instead of qualifying based on the lower discounted rate, you have to qualify based on the higher posted rate of the big six banks (also known as the qualifying rate). To put this into perspective, the qualifying rate sat at 4.64 percent last week, while you can easily find mortgage rates under three percent.
Before the new rules came into effect, you could get around this by qualifying for a five-year fixed rate mortgage. You used to be able to qualify based on the discounted rate – not anymore. Now you must qualify based on the higher posted rate if you’re putting less than 20 percent down.
How Do the New Mortgage Rules Affect Your Housing Budget?
Saving a 20 percent down payment is challenging, especially in cities like Toronto and Vancouver where the average detached house sells for over $1.3 million. The new mortgage rules will have a serious impact on how much house you can afford.
Under the old rules, with a modest annual income of $100,000 and a down payment of $40,000, at a mortgage rate of 2.17 percent, your housing budget would be $665,435. However, using the new rules and the higher qualifying rate of 4.64 percent, you’d only be able to spend $521,041 on a home. That’s a loss in purchasing power of $144,304.
How the New Mortgage Rules May Help You
I know what you’re thinking: the new mortgage rules stink! They make it harder to buy a home. How could they possibly help me? While the new rules have been criticized a lot in the media, what’s not getting enough attention is how they may actually help homebuyers.
One of the biggest mistakes as a homebuyer you can make is buying as much home as you can afford. Just because the bank says you can go out and spend $850K on a home, doesn’t mean you should. It’s a good idea to do a budget and see if you’re comfortable with what your monthly mortgage payments would be. As one of my famous mentors Dave Ramsey often recommends, your mortgage payment should not be more than 25% of your take home pay. This gives you some breathing room should one spouse lose their job or be forced to work less hours. The last thing you want to do is find yourself “house rich, cash poor,” with little money left to save for retirement and your child’s education.
In almost all cases you’re better spending less than the maximum purchase price you’ve been approved for. Not only will this let you continue to sock away your money and save, if mortgage rates are higher when your mortgage comes up for renewal, you’ll better be able to handle it. Better yet, a smaller mortgage means you can pay it off that much sooner, if you so choose.
Are you still confused by the new mortgage rules? Do you want to know how much mortgage you qualifying for under the old versus new rules? If home ownership or real estate investing is your dream, it pays to work with the right professionals; a financial planner and mortgage specialist. Call our office today we have a team of experts on hand to assist you.