Buying Again?

Here's What's Changed Since Last Time

Depending on when you last locked into a mortgage or got pre-approved for a maximum purchase price, a lot may have changed. The changes are not necessarily bad. In fact, the changes have been implemented to ensure stability in our market and to prevent a Canadian version of the U.S. housing crash. That being said, here's a quick recap of some of the major changes over the last 6 years:

1.         QUALIFYING FOR VARIABLE RATES OR FIXED TERMS UNDER 5 YEARS:

In order to obtain a variable rate or a 1 to 4 year fixed mortgage, you need to qualify at the posted 5-year Benchmark Rate (currently 4.64%). This change was made to ensure that you can afford any future increases in rate if the Prime Rate increases, or once your shorter than 5 year fixed rate mortgage comes up for renewal.

Example:

Assuming a mortgage of $350,000 amortized over 25 years with 5% down payment at current rates:

• 5-year variable rate at 2.35% = Payments of $1,542/month
• 2-year fixed rate at 2.24% = Payments of $1,523/month
• Benchmark Qualifying Rate at 4.64% = Payments of $1,964/month
• 5-year fixed rate at 2.79% = Payments of $1,619/month

To qualify for a variable or a fixed interest rate term that is less than 5 years, you must be able to debt service monthly payments of $1,964 even if your monthly payments are less than the 5 year fixed rate payment of $1,619.  In other words, instead of needing $61,000 of annual income to qualify to purchase this home, you would now need $72,500.

2.         AMORTIZATION REDUCED:

The maximum amortization allowed for insured mortgages was brought down to 25 years from the previously allowed 40 years. Shortening the lifetime of your loan increases monthly mortgage payments amounts, decreasing the maximum amount of mortgage for which you can qualify.

3.         NO MORE INTERST ONLY PAYMENTS ON CREDIT:

When calculating your debt coverage we now have to use 3% of your outstanding balance for a monthly payment. And with the majority of lenders, this includes any student loans that may not yet be in repayment (if they show up on your bureau).

So that $15,000 unsecured line of credit with $75/month interest only payments? Now we need to calculate that debt in at $450/month. For a typical borrower with a yearly income of $50,000, at an interest rate of 2.79%, purchasing with 5% down, that decreases the purchase price you qualify for by about $55,000!

 4.         BUSINESS FOR SELF (STATED INCOME) MORTGAGES:

Stated income has been impacted more than any other mortgage product.  It used to allow self-employed individuals to state a reasonable income instead of the total income reported on their tax return.  This recognized that many write down their income or hold income in their companies instead of drawing it to avoid higher taxes.  We’ll cover this change in more detail in a future newsletter, but there is significantly more documentation now required for those who are self-employed.

What Does This All Mean?

Tightening mortgage qualification rules make mortgage planning and thorough pre-approvals even more important.  If you have purchased in the past, your purchasing power may have changed significantly.  With stricter lender policies, having access to a variety of different lenders through a broker also becomes more important.  You may not fit one lender's policies, but can be approved under another lender's guidelines. Long before you go shopping, contact a mortgage professional to determine your options. 

Pre-approvals are not just for first time home buyers.  If you are considering another purchase call me early to determine your options.