On June 1, Canadian banking regulators introduced tougher mortgage stress test rules in a bid to regulate the housing market and prepare homeowners for potential increases to interest rates.
The new rules affect all Canadian homebuyers applying for or renewing a mortgage, whether it is uninsured (more than 20 per cent down payment) or insured (less than 20 per cent down payment).
To qualify for a mortgage under the new regulations, borrowers must prove they can afford either two percentage points higher than the contract rate or 5.25 per cent, whichever is higher.
It’s a small increase from previous regulations, which required buyers to prove they could afford either two percentage points higher than the bank rate or 4.79 per cent, whichever was higher. For some first-time homebuyers, however, the move cuts even more into their borrowing power in what is already a tough market.
“The average consumer’s borrowing power has been reduced by between 4 to 4.5 per cent,” says Nick Da Silva, director of mortgage operations and mortgage broker at Northwood Mortgage in Markham, Ont.
“So depending on how much of the borrowing was going to be part of the financing for a purchase, versus from the down payment, even if you max out on what their capabilities are, that means that their purchasing power has dropped by about 3 to 3.5 per cent.”
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In partnership with Northwood Mortgage, we take a look at strategies that first-time homebuyers can use to cope with the new stress test rules when purchasing a home.
Work with qualified professionals
Having a qualified realtor and a mortgage broker to watch the market and pitch on your behalf will start your home-purchasing journey off on the right foot, Da Silva says.
Realtors can help guide you through bidding wars and advise you on the whole story behind a listing price, while scoping out markets and area availability to get you the best deal.
Mortgage brokers will shop around for the best rate and help you prequalify for a mortgage before you ever put in an offer on a home, which is beneficial in a hot market when many sellers are looking for offers with few-to-zero condition clauses.
A mortgage broker will also ensure you get all of your paperwork together in advance, such as proof of where a down payment is coming from and proof of employment. They’ll also get to know you on a personal level so they can pitch you to lenders.
“If you have 20 per cent or more of a down payment and a good enough credit profile with a solid job and everything looks very solid, some of the institutional lenders are giving exceptions,” Da Silva says.
“If you have an advocate, like a mortgage broker who is pitching a good story on your behalf, the institutional lenders are stretching the debt servicing requirements a little bit to offset some of the loss that’s been incurred because of the higher stress tests.”
Increase your down payment
Da Silva is suggesting that clients consider ways to increase their down payments to make up the difference in borrowing power under the new stress test rules.
To get an uninsured mortgage, you have to have a minimum of 20 per cent of the purchase price as a down payment. But he says to aim for more if the 3 per cent loss in borrowing power as a result of the new stress tests will make or break an offer on that dream home.
That could mean taking money you’ve put aside for potential renovations on your new home and applying it toward the down payment instead. Loans or gifts from family members are also becoming more commonplace, according to Toronto realtor Steve Weisz of Re/Max Realtron Realty.
“Family is one of the bigger influences. People selling the big house and moving to something to give the kids some money and give them a chance to get into the real estate market,” he says. “Or financing their house for the kids, which is probably not the smart thing. But I would say a lot of times, it’s family helping, and why shouldn’t you help your kids?”
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Take advantage of first-time homebuyer offers
First-time homebuyers looking to increase their down payment can also turn to their RRSPs. The Canadian government’s Home Buyers’ Plan allows you to withdraw up to $35,000 from your RRSP tax-free if you are putting it toward the purchase of your first home. You can then put that amount of money back into your account over a 15-year period.
There are other offers available exclusively to new homebuyers to consider before purchasing your first place. In Ontario, for example, first-time homebuyers may be eligible for a refund on all or a portion of their land transfer tax. There’s also the home buyer’s tax credit and the GST/HST Housing Rebate program.
Your mortgage broker and realtor can help guide you through all of the financial incentives available to you based on your location and qualifications.
Reconsider your needs
If you’ve gone through your finances and considered all other options, it may be time to re-evaluate your needs. Weisz recommends looking at a condo or a townhome instead of a detached house, for example. You may even think about broadening your search scope and considering a town or city with more inventory that’s within your price range.
Want more information on the mortgage stress test rules or getting into the market as a first-time homebuyer? Contact Northwood Mortgage to talk to a professional.