Rising Rates and Stricter Qualifying Guidelines May Make it Harder for you to Qualify for a Mortgage and Lower your Purchasing Power Even Further
(to be in effect by December 31, 2013)
When purchasing a home, the keys that impact how much and whether you qualify at all are based on:
- your income
- credit and debts including your new mortgage payments and
- available down payment.
July 2012 – significant mortgage legislation changes were announced. Changes that impacted qualifying for a mortgage including:
- using a higher interest rate to qualify depending on the term you select
- more income verification and down payment for the self-employed
- lowering the amortization to 25 years.
All these changes impacted mostly those that have less than 20% down payment and therefore require default insurance (CMHC, Genworth or Canada Guaranty).
Unfortunately, there are more changes to come. In fact, many of the lenders are already implementing these changes as I write this blog although these changes are mean to come into effect December 31st, 2013.
All these changes are intended to curb consumer debt accumulation. The fear is that we as a nation are spending far and above our income levels. The government is striving to reinforce the importance of ensuring that borrowers do not over extend themselves financially with more debt than they can handle.
The downside is that these changes are impacting the ability for many to qualify to purchase a home, especially impacting first time home buyers. In major cities, such as Vancouver, it is a struggle to find an affordable property that they qualify for, within a decent proximity from work.
December 31, 2013
- Debt: 3% of the outstanding balance on all unsecured lines of credit and credit cards will be taken as the minimum payment, even if you have a lower minimum monthly payment required by the creditor.
- For secured lines of credit that are registered against real estate (HELOCs) lenders will calculate the minimum payment by either using the benchmark rate (which as of today is 5.34%), of the actual interest rate you are paying. Taking the outstanding balance and amortizing over 25 years, using the rate to determine a minimum monthly payment Some lenders are taking this one step further and using the “credit limit” instead of the outstanding balance.
If you pay your entire balance off each month and are able to provide confirmation, then you will not be impacted by this change. ***Work with your mortgage provider or Financial Planner, (or me) on setting up a personal household budget so that you have a plan in place to pay down your existing debt.
- Guarantors: if you can’t qualify for a mortgage on your own, often a guarantor can be added to your application. The new changes dictate that the guarantor must be living in the property, and also you must still be able to qualify for the mortgage on your own without the guarantor’s income
Ensure that you purchase a home and obtain a mortgage that you can actually afford to pay back on your own without financial contribution from a guarantor. You may have to adjust your wish list a bit.
- Heating Costs: using about $75-$100 per month to calculate the cost of heat in your qualifying has been the norm. Until now. Lenders will be using estimations based on the purchase price, size of the property and location, to determine heating costs.
The reality is you are most likely going to be paying more than $100 per month on heat and utilities anyway so ensuring that you can afford these bills is a good thing before you buy the home. You can ask the current owner for copies of the utility bills over the last 12 months to get a feel for the costs of heating over the course of an entire year. Of course your usage may vary from the current owner’s usage but it gives you a pretty good idea.
These changes, along with recent rising interest rates, are impacting the amount borrowers qualify for which in turn determines the purchase price of a home. Does this mean that we should expect prices to start falling???
(I wouldn’t hold my breath)
So what happens next? Firstly, don’t panic as these changes may not impact your particular situation at all. If you are considering either moving and purchasing a bigger home or purchasing your first home, call me for a free consultation to see exactly how these changes may impact your qualifying for a mortgage. There are many strategies we can discuss together to make your dreams of home ownership an affordable reality.
Be prepared for these changes so you we can create a clear plan and path to home ownership for you.
Be wary of banks that offer you an extremely low initial rate with a significant increase a year later. For a first time home buyer in Canada, the complexities of mortgages can be very overwhelming, and it can be easy to get locked into a mortgage without getting the best rate possible.
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