The mortgage market is still adjusting to the new rules that came into effect on January 1, 2018. With all borrowers now having to qualify at the Bank of Canada Benchmark Rate (currently 5.14%) or the contract rate plus 2% regardless of how much down payment they have, we are seeing a drop of about 20% in purchase power across the board. The impact on consumers can be painful in some cases. Here are just two stories from clients I’m currently working with.
First a young mother who qualified about 3-years ago for a condominium but at the time she didn’t realize her RRSP was not accessible for her down payment. She had to pull out of the market to work on accumulating the required down payment.
Shift forward to today and she has received a gift from her parents of $285,000 for a down payment and wants to take another run at the market. You may think that having this much to put down would make a suitable purchase a no-brainer.
Unfortunately, she is currently on disability after a car accident. She receives pretty much 100% of her regular pay and carries no credit balances but having to now qualify as if her interest rate were 5.49% (contract rate of 3.49% plus 2%) she can only get a mortgage of $100,000 putting her maximum purchase at $385,000. In today’s Vancouver real estate market this likely puts her into an aging building about a 45-minute drive from her child’s school. She now wonders if it’s even worth it.
Case number two… a recently retired government worker.
He and his brother inherited their parents home this summer after their mother passed. They will sell the house this spring and my client will have about $400,000 to buy a modest retirement home.
Because of a reduced income and a higher qualifying-rate he now no longer has any bank options even though his payments will be quite manageable. We need a mortgage based on pure equity and these options are slim and come at a higher rate from only a few lenders. How fair is it that this gentleman with stellar credit will be basically penalized by having a higher rate and payment after years of public service?
The government’s efforts to protect the public from overextending themselves has gone too far with this last move. Canadians are extremely responsible when it comes to paying their mortgages. Less than 1/3rd of a percentage of mortgages are in default – we just make our payments, period.
Consumers who have been concentrating on building equity and down payments are feeling the brunt of the impact. Instead of being rewarded for their efforts they have been given fewer options. If this is the new mortgage reality, now more than ever a Mortgage Broker is truly an asset.