I am sure everyone has
heard of the new legislated mortgage qualification policies by now. To summarize, on April 19, 2010, three
changes took place in the mortgage world that were legislated by the Canadian government’s Department of
Finance:
All mortgages are now qualified at the greater of the contract rate or the five-year benchmark rate as
defined by the Bank of Canada.
Business for self-employed individuals wishing to use “non-verifiable” income programs will now need a
minimum of 10% down payment. Any refinances under such programs must leave a minimum of 15% equity.
Investment property purchases now require a minimum of 20% down payment. All other program changes by insurer
or lender are self-imposed. Though these regulations seem straightforward, the impact of these changes is
significant. To illustrate, let’s consider item number 1, concerning mortgages.
Using the current five-year benchmark (bank posted) in qualification means that Canadians will qualify for
roughly 23% less in mortgage amounts compared to using a three-year discounted fixed rate, the rate
previously used by most institutions in variable rate qualification. Both rates assume, of course, that the
purchaser’s household income doesn’t change over the respective time periods.
If we directly compare the amount of square feet of living area to purchase price it gives us a good visual
estimation of the differences. Instead of being able to purchase that 3,000-square-foot home in your chosen
area, you would qualify for roughly a 2,300-square-foot home in the same market area.
Take this one step further with your realtor, and they can illustrate what this difference in living area
means when considering property types and market areas. It could very well mean the difference between a
townhouse and a single detached home.
This
five-year benchmark rate legislation does not make purchasing prohibitively expensive. Rather, it protects
both the Canadian consumers and lenders by making the qualification guidelines more conservative.
The mentality here is that homeownership should not be a struggle to maintain, but rather a decision to be
managed responsibly: If using this rate as a yardstick places financial strain on an individual, the purchase
more than likely should not happen in the first place.
The new rate
means that you may have to adjust your expectations on your next home purchase. You may need to explore
methods of strengthening your mortgage application, or consider different property options
altogether.
You may have to bring a co-applicant on your mortgage application to qualify for a greater amount. You may
have to find a property that generates some rental income to help qualify. Alternatively, you may also end up
purchasing a smaller house and trading up to the big one you want a few years down the road by using a
“Stepping Stone” approach.
You can still purchase your dream home using the five-year benchmark for qualification. Mortgage applicants
will just have to find ways to strengthen their mortgage application. I have mentioned just a few here. This
change is good for consumers and lenders, and promotes economic stability. While change is not always easy,
with it comes opportunity. •
You can find more ways to strengthen your mortgage application on my website, michaelmcivor.com. You can
also find more information about the other two changes not discussed here.
