What are the new mortgage laws and how has it impacted Ontario Real Estate Market

Ever since homebuyers have stepped into the new year, they’ve been faced with new mortgage regulations that represent another setback on their way to home ownership. In addition to last year's price hike and the recent interest rate increases, buyers are now expected to qualify for a mortgage under the toughest stress tests so far, even those who can afford a 20% down payment.

According to it, all mortgage applicants have to prove that they can qualify at a 2 percent higher rate than the actual one or at the benchmark rate of the Bank of Canada, whichever happens to be higher. In short, this means that buyers need a 15% to 20% higher income to qualify for the same mortgage amount they could have qualified for in 2017. In reality, you would just pay off the contracted rate, but lenders need to be sure that you potentially could handle your payments in case the interest rate increases again.

Let’s illustrate it with an example. Imagine that you want to borrow $500,000 to buy a house and pay it off over a 25- year amortization period whereby you have a 20% down payment ready. At a contract rate of 3.5%, you could get the $500,000 with an annual income of $75,000 in 2017, but now, you’d need $90,000, as you’d be stress-tested against a 5.5% rate.

Where Are We Now?

The new rules in combination with the interest rate hike and quite high prices certainly slowed down the market. Buyers in Toronto and the GTA had to stretch significantly to afford a home in the hot market even before the interest rate increases and the OSFI rules, which means that the changes further pushed them to the margins.

Some buyers have simply been priced out of the market, while the ones that are left enjoy a more balanced market than last year. There are fewer bidding wars and more inventory to choose from. Buyers are expected to get back in the market later this year, but the number will probably not be record-high as last year.

Some buyers have also opted for alternatives like credit unions and private lenders which don’t have to follow OSFI rules, but some of them have also imposed stricter regulations to protect consumers from further interest rate hikes.

When it comes to the home prices, they are expected to increase in most cities in Ontario, and despite the slowdown, there are still some areas that are in a seller’s market. Prices will not only increase for detached but for condos and townhouses as well, given that more buyers will turn to these more affordable markets.

The trend of looking for properties in nearby but less pricey towns or the suburbs will continue this year as well. Last year, we have seen people moving from Toronto to more affordable cities like Brampton, Oshawa, Newmarket, Hamilton, etc. Overall, we can say that the new rules have contributed to a more balanced and healthier market decreasing the gap between supply and demand.

Sellers will probably have to be more patient this year and try to find the right moment to list their homes. They don’t want their home to decrease in value while they’re waiting for buyers to come around. This means that they need an experienced realtor to develop a full-scale selling strategy who will be able to recognize when the timing is right, i.e. when buyers start coming out of their shells.  

Buyer should talk to mortgage brokers and realtors to discuss their options objectively and if there’s anything that can be done to help them qualify. Having parents and family help out with a bigger down payment to reduce the mortgage amount is very common. They can also pick a longer amortization period, e.g., 30 years instead of 25, to get the desired amount or buy a smaller home, like a condo instead of detached if they want to make it work with the amount they’ve got. Given that we are partners with the RBC, we can get our clients the best possible mortgage deals in line with their credit report. Call us to find out about the different mortgage programs and tax refunds and which ones are available to you.