New Mortgage Rules Came Into Effect October 17, 2016

I've posted several articles recently about this and the bottom line is that all mortgages that has to be insured- those with less than 20% down payment- has to pass something they have called a Stress Test. What it really means is that a buyer's income must be sufficient to carry a mortgage computed at 4.64% for qualification purposes. This makes it all the more important to speak with your Real Estate Agent as Mortgage Brokers are finding ways on how to cope with this new rule which effectively requires 12% to 18% more income than it used to in order to qualify. Read the following article.

Canadian Mortgage Brokers Find Around New Lending Rules

excerpted from The Financial Post

Canada’s new mortgage rules risk pushing borrowers deep into the shadow lending market, with brokers set to line up secondary loans with private lenders as a means of circumventing tests on borrowers’ ability to repay debt.
Canadian officials have become increasingly alarmed by systemic risk from record household debt levels and a frothy housing market. In the latest bid to cool the red hot Vancouver and Toronto markets, Ottawa’s new rules require lenders to stress test borrowers’ ability to pay back loans at levels higher than current rates.
As a way around them, brokers are planning to direct more borrowers to the so-called shadow lending market where private investors, frustrated by low interest rates on savings accounts, are eager to lend at rates that can enter the double digits.

These combined loans take borrowers up to the kind of loan-to-value ratios that were common in the United States prior to the 2008 subprime mortgage crisis.

Canada’s biggest non-prime lender Home Trust is already selling a “bundled” product, twinning a conventional mortgage with a second loan by private lenders, which enables home buyers to borrow up to 85 per cent of a property’s value.

The new rules that took effect on Oct. 17 require buyers applying for an insured mortgage to show they can afford to pay it back at the Bank of Canada’s five-year fixed rate of 4.64 per cent. Canada’s biggest banks currently offer mortgages at rates about two percentage points below that.
To bypass that test, buyers can make a 20 per cent down payment that qualifies them to take out an uninsured mortgage. Brokers said many buyers will turn to unregulated private loans to enable them to make that payment.

Rising costs

“It pushes Canadians into private second mortgages, and it’s just costing more and more money for these people,” said Toronto broker Mark Cashin, who has arranged such deals in the past and expects to see more under the new rules.
Cashin said private second mortgages in Toronto typically charge between 7 and 10 per cent in interest.
“It’s not a good option but maybe it’s the only option we’ve got,” said Ron Alphonso, a private mortgage lender and mortgage agent who arranges home loans for borrowers who can’t get financing from mainstream banks.
Alphonso said he is working on two cases where he’s trying to arrange secondary lending by private investors to enable clients to obtain mortgages.
“It’s a way to get around the new rules,” he said.

Investor pools

As an alternative, he said he is looking to pool together a group of private investors to invest around $50 million offering mortgages to borrowers that don’t pass the new tests at annual rates of between 4 to 6 per cent.
Debt counselors said the rules could have the unintended consequences of allowing aggressive alternative lenders to take a bigger share of the market.
“They are going to turn to these unconventional lenders and pay higher prices and it’s not just going to be a higher price for one year, it could be a higher price for three, four, five years,” said Scott Hannah, chief executive of Canada’s Credit Counseling Society, a charity that advises people on debt.
“They want to get into the market, in some cases at any cost, and the cost is going to be a very high mortgage payment.”
Canada’s finance ministry and Home Trust did not immediately respond to requests for comment.

What Could the Coming Changes to Mortgage Rules Mean to You?

Chart A- shows how Sales behaved in 2016 & the past 3 years

Chart B- shows how Resale Home Prices behaved in 2016 & 3 years past

There are impending changes to mortgage rules that will take effect soon as announced by the Federal government. I have also posted at the right column articles to this effect- scroll down to Real Estate News- Recent Developments.
How this will affect you as a homeowner whether a first time buyer, a move-up seller/buyer, or investor, needs some careful consideration.
Chart A shows the monthly number of sales in the GTA to September last month (see 5-point star) and the past 3 years. From this month (October) to year end you can expect a decline in the number of sales- see downward arrow I placed from its peak in June. It's effect on you will depends on what you aims are real estate wise in the next few months.
Now consider Chart B. It shows the monthly average resale home prices and 3 years before. Note the average prices for September (marked with 5-pt star) which is on the high side if not the highest, yet September is supposed to be the start of the decline in the number of sales as shown in A. I put clouds from October to year end as we do not yet know how prices will behave in the next few months because of these forthcoming changes to mortgage rules.
Whatever your next moves are contact your real estate agent.