WHAT WILL YOU BE ABLE TO AFFORD ON JANUARY 1, 2018?
On October 17th, the Office of the Superintendent of Financial Institutions (OSFI), Canadas banking regulator, announced that it will be establishing a new minimum qualifying rate, or stress test, for borrowers making a downpayment of MORE than 20% of the homes value. Since November 30, 2016, stress test requirements only applied to insured mortgages (those with down payments of less than 20%) and most variable mortgages and terms less than five years.
Here is a bit more insight into the changes that are happening as of January 1, 2018 for uninsured mortgages/customers with 20% or more downpayment:
1) As of January 1, 2018, the borrower will have to qualify at the GREATER of either two the contract rate plus+ 2% OR the Bank of Canada Benchmark Rate (currently 4.99%)
2) High ratio mortgages greater than 80% loan-to-value will still be qualified at the GREATER of the contract rate OR the Bank of Canada Benchmark Rate (the 2% is not added)
3) Firm Agreements of Purchase and Sale dated prior to January 1, 2018 will qualify under the current rules (regardless of the closing date)
4) Firm Agreements of Purchase and Sale dated after January 1, 2018 will require the borrower to qualify under the new rules. (Rule 1 or 2 above)
5) Refinances approved prior to January 1, 2018 must close within 120 days of application date to qualify under current rules.
6) Pre-approvals that have not been converted to live deals before January 1, 2018 will be subject to the new rules.
Here is an example of how this new rule will affect you:
Under the current rules, prior to January 1, 2018, you can qualify at your contract rate being offered by the lender (for this example I will use 3.39% as the contract rate) with 20% or more downpayment:
$700,000 - purchase price
$140,000 20% down payment
$560,000 mortgage 80% loan-to-value
3.39%, 5 year term, 25 year amortization
$110,000 annual income to qualify
GDS (gross debt service ratio) = 36.88%
For the same income and purchase price under the new rules as of January 1, 2018:
You now must qualify at the greater of the benchmark 4.99% or the contract rate +2%
If contract rate is 3.39% then (3.39% + 2% = 5.39%) so 5.39% is the rate they must qualify at because it is greater than the benchmark rate.
Example above redone using contract rate +2% = 5.39%:
$700,000 - purchase price
$250,000 down payment client requires more down to qualify for this purchase
$450,000 mortgage 64% loan-to-value the client now qualifies for $110,000 less
3.39%, 5 year term, 25 year amortization, qualified at 5.39%
$110,000 annual income to qualify
GDS (gross debt service ratio) = 36.39%
You would have originally qualified for a $560,000 mortgage under the current rules; under the new rules you will qualify for a $450,000 mortgage - that is $110,000 less. Based on the above scenarios, under the current rules you qualify at 80% loan-to-value; under the new rules you will qualify at 64% loan-to-value - that is a difference of 16%. You will qualify for 16% less than you can now under the current rules (the above calculations are for scenario and illustration purposes only).
Bank of Canada increases overnight rate target to 1 1/4 per cent
The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.
The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Banks October Monetary Policy Report(MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.
In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.
Fourth Quarter Housing Market Trends Seal 2017 as ‘the Year of the Condo’
According to the Royal LePage House Price Survey, Canadas residential real estate market saw strong, but slowing year-over-year price growth in the fourth quarter of 2017. While year-over-year aggregate appreciation remained high in the Greater Toronto Area (GTA) and Greater Vancouver, two-storey and bungalow home values softened in the GTA, slightly declining on a quarter-over-quarter basis. Meanwhile, in both Greater Vancouver and the GTA, condominium prices continued to outpace all other property types, primarily due to growing affordability constraints within these markets.
The Royal LePage National House Price Composite, compiled from proprietary property data in 53 of the nations largest real estate markets, showed that the price of a home in Canada increased 10.8 per cent year-over-year to $626,042 in the fourth quarter of 2017. When broken out by housing type, the median price of a two-storey home rose 11.1 per cent year-over-year to $741,924, and the median price of a bungalow climbed 7.1 per cent to $522,963.
During the same period, the median price of a condominium appreciated faster than any other housing type studied, rising 14.3 per cent to $420,823 on a year-over-year basis. This trend was predominantly driven by the significant price gains witnessed in many of the countrys largest condominium markets. In the GTA, the median price of a condominium increased 19.5 per cent year-over-year to $476,421, while in the City of Toronto, the segment saw a similar gain of 19.6 per cent year-over-year to $515,578. In Greater Vancouver, condominiums also followed a similar price trajectory during the quarter, rising 20.2 per cent to $651,885, while the median price of a condominium unit in the City of Vancouver rose 18.7 per cent to $775,806. Many suburban markets across the GTA and Lower Mainland of British Columbia posted strong year-over-year condominium price gains of 20 per cent or more as well, with the segment appreciating at a faster rate than detached homes, which had previously led the charge.
To prospective homeowners in our largest cities, condominiums represent the last bastion of affordability, said Phil Soper, president and CEO, Royal LePage. This is especially true for first-time buyers whose purchasing power has been reduced by tightening mortgage regulations. Click here for more.