October 17th 2016
Now that the changes to the Mortgage Industry are official, I thought I might shed a little light on who and how these changes will impact our clients and in turn the housing market.
For starters, these changes that take effect today do not mean that all our clients with 20% down are in the clear. Banks and Mono-line Lenders will be using the stress test at their own discretion. These changes have a resonating impact on the industry as they are like a “gateway drug” to other bigger changes that may follow as the year goes on. The biggest hit by this change are, and have always been the “first time home buyers”. The government’s attempt to quell these ridiculous home prices has in my eyes failed.
Allow me to explain. I understand what the “Department of Finance” is trying to do, but 1st time home buyers are not the ones who in my opinion are driving prices up. The way I see things, it is that fact that people are just not selling their homes, by limiting the supply the demand will increase. More people are refinancing their home, doing add-ons, finishing their basement to add more living space or just straight out rebuilding from the ground up. People are just not selling! You hear it time and time again…”If I sell now what am I going to buy”. With prices at an all time high, your money just does not go that far, unless you move further north of Toronto. Even then you’re not getting a crazy deal.
This stress test has really limited buyers. See if you were able to get approved at a 500K mortgage at the discount rate of 2.39% and now you will have to qualify at 4.64% (Today’s Benchmark Rate) you have just chopped your purchasing power to 420K. If that did not seem crazy think of this, what can you buy with 500K today in the G.T.A and now think of what 420K gets you. What that means is that the condo market is looking more and more attractive to buyers on a newly reduced budget. Before the change you may have been looking at town-home but now you’re stuck with buying a condo.
I know that the government is trying to make sure that people do not get in over their heads, well a little too late for that. See the first time home buyer is the easy target, always was and always will be. I think of things a little more cynically. I say if you want to curb home values go after the people that are constantly refinancing there homes for 30 year amortizations. You cannot access market equity if it’s not all there for you to take out. If values increase the amount of money you can take out against that home should be capped. Right now it has to be 20%. See you should not allow people to take a 30 year amortization over and over again, 25 year amortization max or implement a sliding scale. See back in the day people paid off their mortgages. Today we will most likely die with one, or pass it on to our loved ones.
The way it should be is that after your 5 year term, your mortgage moves from 30 years to 25 years ,and then to a 20 year…and so on until paid. In the case of an Insured Mortgage it starts at 25 years. Now I’m not saying that you cannot access your money, at the end of the day it’s yours, but limit the amount you can borrower against. Some banks already doing this or charging a premium if your take out the money out in cash. By doing this you will limit exposure to higher debts loads, you will limit investors from borrowing or leveraging equity on their primary residence to buy more properties. That is the goal to calm the market is leave homes for 1st timers not for investors.
See if you want to cool a market you do not attack the young family who wants to move out from their parents basement or out of there condo. The only way to help young buyers is through (BMD) the Bank of Mom and DAD. That gifted money often comes from the equity in their primary home or from the cash under the mattress. Parents now more than ever will need to help their kids get a home and get started.
In the end I do not think that these changes will have the desired effect to the markets. They will not correct or drop, they will just level off. That means prices will not move. How can these changes impact the markets if you don’t have enough homes for the amount of buyers and even if these changes impact 5% of 1st time buyers, the investors will start to scoop more homes because guess what…rents are going up 100%.
My projection is this. In a few months after we are able to gather some complying date the GTA will see slight/moderate slowing down in volume sales (with relatively liner sales prices). This will be followed by the BoC (Bank of Canada) eventually reducing the Benchmark rate of 4.64% and possibly a drop in the “prime lending rate”. The final predication is that we will also see a massive surge in the condo market sales and sell-off of any inventory.
Anthony Venuto- Mortgage Broker
Centum Streetwise Mortgages #11789