Get good grades in high school and get accepted into the program we want, at a school we think suits us well. Graduate from school with decent grades, get an entry-level job in our field and continue to grow as a young adult. Eventually, put away enough money so that we can buy our first home.
This is how the majority of young Canadians plan the early stages of their lives. Owning a home comes with a sense of pride – it is a badge of achievement which you don’t wear, but live inside. It is an accolade you can recognize for yourself every day, an accolade that reminds you that you accomplished one of your largest life goals. For most, it is the first true step in becoming an adult.
Potential first-time home buyers who are looking to accomplish this goal may or may not be aware of the oncoming changes to mortgage rules in January 2018. These rules will make it harder for all home buyers to qualify for a mortgage, not just first-time buyers. Many Canadians who were thinking about buying a new home are now scrambling to sign their contracts before January 1st. Here are the main reasons why buying before January 1st, 2018 is a smart idea:
Your Buying Power Will be Lowered 15-20%
As a part of the new mortgage guidelines, financial institutions will need to vet all potential buyers of uninsured mortgages (mortgages made with a down payment of 20% or greater). They will do this by using a minimum qualifying rate equal to the Bank of Canada’s five-year benchmark, which is currently equal to 4.89%, or their contractual rate plus 2 percentage points.
This means that applicants will no longer be able to negotiate for lower rates, but will have to have their assets “stress-tested” against the Bank of Canada’s benchmark. Many experts in the field estimate this measure will reduce the buying power of homeowners by 15-20%. Citizens around the country are now rushing to qualify for the mortgages before the stress test is put into place.
If a borrower doesn’t pass their stress test, they will have three main options. The first way to go would be to decide not to purchase the home, which is not optimal, for obvious reasons. The second option for them would be to put more money into their down payment, which for some may not be possible. Alternatively, borrowers may opt to find a co-signer with a substantial income willing to sign onto the loan – which is not an easy feat to accomplish.
You May Have to Keep Renting for Longer
Let’s look at an example to illustrate how the new rules will impact a home buyer’s purchasing power:
A couple has an income of $100,000 and can afford a down payment of 20% at a five-year fixed rate of 2.83% amortized over 25 years. They would be able to afford a home worth roughly $730,000 with today’s mortgage rules.
Under new rules, they need to qualify at a rate of 4.89% instead. This now means they will have to pay much more towards their mortgage over their payment period. They would now be able to afford a home worth roughly $660,000 – a difference of about $146,000, or about 20%.
This difference in affordability now creates a gap which home buyers will need to make up for. For many first-time buyers, this will mean they will need to rent for longer while increasing their savings in order to pass their stress test. While this is not an ideal situation for people who are looking to escape the life of renting, it is a reality that they must now face.
Alternatively, buyers may opt to go for a condo or a cheaper option instead of waiting to be able to afford a larger home with a more traditional feeling. For first-time buyers who envision their first home as a clean-cut townhome on a residential street with a fence, yard, and modern aesthetic, this might not be desirable.
Take Advantage of the Present
While these new rules come create an unfortunate reality for buyers, there isn’t much they can do – except act now.
Luckily for potential buyers in Ottawa, Stittsville Walk still has a few 3-story executive townhomes available – but not for long. Tucked away in a Euro-inspired setting in the heart of Stittsville, this urban village setting is highly sought after by young professionals. Surrounded by amenities, green space, and just minutes from downtown Ottawa, these modern properties are sure to meet all your needs.
Thinking about buying a home and don’t want to get caught in the new mortgage rules? Contact Stittsville Walk today to book a viewing of one of our beautiful townhomes.