It’s not a kick in the teeth! The upcoming Mortgage Rule Changes are good for Canada
By now many of you reading this have already heard about the new housing measures unveiled earlier this week by Finance Minister Bill Morneau. Here is a brief summary of those changes:
Mortgage Rate Stress Test to All Insured Mortgages
Eligibility Requirements for Low-Ratio Mortgage Insurance
Capital gains exemption for a primary residence
A potential policy on lender risk sharing
While all of these upcoming changes deserve in-depth discussion individually, the one garnishing the most attention thus far takes effect on October 17, 2016. The “stress test” change is how borrowers will qualify or obtain an approval for their home’s financing when needing mortgage default insurance such as CMHC, Genworth or Canada Guaranty. While many will see the swiftness of these announcements as a kick in the teeth, there is another perspective worth considering.
Today if someone were to apply for financing to purchase a home with a five per cent down payment their application would be qualified by using the actual five year fixed interest rate; let’s say that’s somewhere between 2.35 – 2.59 per cent depending on the lender, the terms, and the conditions of that specific mortgage. To “qualify” means that the borrower must demonstrate they can afford the housing payment in relation to their income and other expenses. Therefore with a household income of $80,000/year a buyer will qualify for the purchase of a home priced at $500,000. However once the new mortgage rules take effect that borrower would have to demonstrate that they can afford the same mortgage based on the Bank of Canada (BOC) posted rate at 4.64 per cent. Subsequently if not, this same buyer would now only qualify for the purchase of a home priced at $400,000.
While the BOC posted interest rate is clearly more than the actual rate the client will be receiving this new measure provides assurance that should rates be higher once the initial mortgage term is up, the borrower will still be able to handle the increased mortgage payment at the time of renewal. The ramifications of this change means that some, not all, borrowers will be faced with purchasing a home that is priced significantly less than what they would have qualified for under the current guidelines.
Naturally as a result of this fact you’ll hear some well-meaning people, both consumers and those in real estate and financial services, complain that these latest measures will have a ripple effect with a major impact; a possible decline in home prices, lost tax revenue, stifled job growth – and they are right! Undoubtedly, there will be fallout once these changes take hold but we need to be ok with that . . . yes I said it and here is where I’ll stick my neck out with what may be viewed as an unpopular stance on this issue. There are those that are complacent over the role that housing prices and rising debt levels play in the overall health of our nation’s economy. They seem more interested in protecting their personal interests and their pay cheques today, rather than confront the potential reality of a bankrupt future. The official housing announcement communicates the actual motive behind the implementation of these changes:
“Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s commitment to help the middle class and those working hard to join it.”
How can you argue with that Department of Finance statement? If our appointed officials kept the status quo then the above example about a home buyer celebrating their $500,000 purchase would later regret it as they could find themselves with an increased payment of over $400/month in a higher rate environment. If unable to keep up with the increased payments that homeowner would go into arrears as the property eventually falls into foreclosure. Simple math means that higher interest rates equal higher payments. Carry that possibility forward a bit further and it would not just be this one homeowner; the same could happen to not only their neighbour but three of the other homes in that same cul-de-sac as well.
Sound too drastic? Perhaps, but having lived in the United States through their housing meltdown, I carry with me the unique position of witnessing first-hand the kind of devastation that can occur to families when borrowing exceeds the usual limits of prudence and practicality. Does this new policy contain the potential to have some collateral damage with the short notice provided of its implementation; yes. Will it impact my personal business and its revenue; yes. Will this tougher standard sting in the short term; yes. Will some people have to prolong their dream of home ownership and rent a little while longer: yes. Will there be families that have to save more for a down payment or choose something more within their means; yes. But are these new measures better than living as a nation in denial of its household debt? YES! While uncomfortable on many levels this IS better than suffering the eventual outcome of a meltdown of equal or greater impact than what happened in 2008.
So for all those articles or posts you’ll read grumbling that this is not good for our local or global economy; or for the online videos spouting doom & gloom, is it because these stricter qualification standards simply do not serve their self-interest, or is it that they are uncomfortable adapting to change? Please keep an open mind and let’s move the conversation from confusion and blame to one that sees this as a means to building a better, stronger, more effective housing finance system for Canada. I for one, despite possible opposition within my own industry will use this platform to applaud the announcement by Minister Morneau and see this “stress test” as being prudent given the climate of debt that is already weighing down so many hard-working people. Rather than do nothing, I am thankful that we have a government that is choosing to take action and lead by example; and it’s this leadership that may be just the very thing that preserves the Canadian way of life that we all enjoy.