If you're finding it hard to secure a mortgage, you're not alone. Ottawa's tougher rules on lending have hit home, particularly with young, first-time buyers, self-employed buyers, real estate investors and buyers who have made pre-construction purchases.
Changes to mortgage rules
The federal government has changed mortgage requirements four times since 2008. Lenders have taken these new rules to heart, preventing many buyers from qualifying for a government-backed insured mortgage. Home buyers with less than a 20 per cent down payment require this insurance, usually supplied by the CMHC.
The biggest change was announced by finance minister Jim Flaherty in July, 2012 and it affects the length of the amortization period-the time it takes to pay off a mortgage in full. (This is not the same as a mortgage term, which is the length of time a mortgage agreement is in effect.)
Historically, amortization periods were available for up to 35 years. The biggest change, made in 2012, was to reduce this to 25 years or less for government-backed mortgages.
With a shorter time to pay the mortgage in full, buyers save thousands of dollars over the long run. On the other hand, they must make higher payments. These cut down a family's ability to pay for other immediate necessities.
It closes certain people out of the market, but the upside is that it's also averting too much household debt and a possible crash in the housing market, which is what happened in the United States. Today, you have to demonstrate to your lender that you can support the mortgage with your job or any other sources of income you may have.
Another change made by the federal government affects refinancing-which is what you do when you renew your mortgage. Lenders no longer offer refinancing to home owners who still owe more than 80 per cent of the value of their property.
Who is affected most?
The current rules are affecting anyone who has a down payment of only 5-to-20 per cent. For one thing, they must qualify for their mortgage at the posted 5-year fixed rate, which is probably higher than what they will actually be paying if they get a variable rate or a shorter-term rate.
But other factors add up to make young, first-time buyers a greater risk in the eyes of lenders.
It’s tough for first-time buyers who tend to be young people. They often don't have high incomes, large down payments or a long employment history. The cost of living is up across the board and many young people are living paycheque to paycheque.
Many of these first-time buyers are seeking homes in the Fraser Valley as it is more affordable than other parts of Metro Vancouver. Sales in the Fraser Valley declined a couple of months after the new rules were introduced, and only started to recover this July.
Self-employed buyers are another vulnerable group, because they have to prove that they have the ongoing income to pay. Lenders require a great deal of paperwork before they will consider self-employed mortgage applicants.
The stricter lending rules have also taken a toll on pre-construction buyers: people who purchased homes before they were built. There have been many stories of buyers who qualified for mortgages before July 2012 and made down payments during pre-construction periods. However, with the buildings now completing, some home buyers are finding they no longer qualify for mortgages.
When they come to actually pay for their homes, the guidelines have changed and all of a sudden they can’t find a lender. In some cases they are forced to sell and likely at a lower price than what they initially purchased for.
Investors have also been feeling the pinch of tougher mortgage rules. Because they may have mortgages on more than one property at a time, investors often make minimum payments on their mortgages. If an investor still owes more than 80 per cent of the value of the home-a perfectly legitimate business practice up until April, 2011-this can cause problems at refinancing time.
There are whispers that Canada's banking regulator, the Office of the Superintendent of Financial Institutions or OSFI, is looking to tighten mortgage rules even further based on concerns that consumers are taking on too much debt and house prices have gone up too much. Banks are still able to sell uninsured 30-year mortgages to home buyers with down payments of 20 per cent or more. OSFI could, if it so chooses, change the rules regarding uninsured portions of mortgages. Mortgage professionals are urging the bank watchdog to leave this rule alone.
Words of advice
This is still a good time to buy. Interest rates continue to be at close to record low levels and the housing market appears to be back on track following the recession.
Save as much money as you can for your down payment and eliminate as much debt as you possibly can on your taxes and your credit cards. When you do find a home you want to purchase, make sure you’re not overextending yourself. Rising interest rates can make it very difficult to make payments if you’re living close to debt. And, there are several extra costs when purchasing real estate like the Property Transfer Tax. You need to make sure you're aware of all the costs and have a true understanding of what you’re taking on. In the end, I think the best advice to anyone out there is to discuss their options with a mortgage broker.