New Lending Policies Will Wipe Out Over Leveraged Buyers

The recent announcement from the Federal Government regarding new lending policies will have a significant impact on the lower-mid range market. Before I explain, you can read the new lending policies here. 

For a quick and simple summary, here’s what it means.

As of right now, anyone who requires a loan and puts down less than 20% is required to have their mortgage insured by CMHC (Canada Mortgage and Housing Corporation). The lender qualifies you at the borrowing rate of currently anywhere between 2.17-2.5%.

As of October 17, a new stress test will be used for approving high-ratio mortgages and will be applied to all new insured mortgages – including those where the buyer has more than 20 per cent for a down payment.

So even though you are only paying a 2.17-2.5% interest rate on your mortgage, the lenders are going to qualify you at the 5 year fixed mortgage rate of 4.64%. This basically means your loan will be much less than before.

stress test loan
Stress test will result in smaller loans handed out.

Impacts on the market?

We already know the detached housing market has taken a huge hit. Recent numbers in my September Detached Market Report show sales were at record lows for some areas. However, things remain relatively hot in the condo/townhouse market. Why?

Let’s be honest, condos & townhouses are what locals can afford. I’m seeing a ton of locals, particularly first time buyers jumping into the market with less than 20% down. Attempting to Claw their way in before the market seemingly takes off another 35% next year. (I don’t believe that will happen).

These buyers with low money down will have to get stress tested at the higher rate. This will likely crush their home buying dreams as they won’t get the loan they need. Which could ultimately be a blessing in disguise for some who are getting in WAY over their heads.

The condo/townhouse market, is, for the most part, driving the majority of the real estate market right now. Eliminating or reducing the buying power at this price point will surely have an overall impact. This could be the straw that breaks the camels back.

Stress test first time buyers
1/3 of buyers requiring insured mortgages could be eliminated from the market.

Pre Sale Market

I don’t think anyone even thought about the impact on the pre sale market. Thanks to one of my friends and mortgage broker Mark Fidgett (www.advancedequity.ca) who pointed it out to me.

For those who just bought a pre sale and were pre approved for a loan, here’s what you need to know.  Once your pre sale finishes construction and you go to close, you will have to get your loan approved again at the new stress test rate of 4.64%.

Although most pre sales require 20% down it could still pose challenges for buyers requiring high-ratio mortgages to get approved.

Not to mention if god forbid the value of the pre sale declines upon closing and the bank decides not to lend you the full value..

Summary

If there was one way to curb demand at the mid-entry level, taking away their buying power would be it…

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