While the country’s new mortgage rules are meant to cool the market, eventually making housing more affordable, they’ve put home ownership out of reach for many prospective buyers.
Those who don’t have a down payment of 20 per cent or more will be limited to a maximum amortization period of 25 years. Since 40 per cent of new mortgages last year were for 26 to 30 years, according to a survey from the Canadian Association of Accredited Mortgage Professionals, real-estate neophytes might feel the change most dramatically.
Deborah Cheng has resigned herself to staying with her parents for a few more years unless Vancouver’s housing bubble bursts.
“I really hope for there to be a big crash. That would probably be the only way to get a place for myself,” said Ms. Cheng, a 30-year-old administrative assistant.
She’s saved $90,000, hoping to put a 30-per-cent down payment on a home. But in Vancouver – where the average price of a detached house this year is $732,736, according to the Canadian Real Estate Association – her options in the $300,000 price range are older-studio and one-bedroom units in high-rise buildings.
“You find out that the building is pretty run-down and you might have to pay a lot for repairs in the near future.”
In the hours after Finance Minister Jim Flaherty announced the new rules, real-estate agents were jumping on Twitter and sending e-mail blasts to first-time buyers, encouraging the ones on the fence to lock in financing for a 30-year mortgage now before the new rules take effect on July 9.
Roger Winsor, a realtor in Labrador City, Nfld., said he understands the government is trying to “help people control their impulses and stop overspending” but questions its strategy.
“A lot of the younger buyers are struggling to get into their first home,” he said.
A mining boom in Labrador has sent housing prices soaring, with even basic bungalows priced at $400,000. Some of Mr. Winsor’s clients have taken out 30-year mortgages simply to qualify, and then after a one-year term, switch to a 25-year mortgage.
Another new rule announced by Mr. Flaherty sets the maximum gross debt-service ratio – the percentage of household income being used to pay for housing – at 39 per cent so buyers will be less likely to take on mortgages that are too big and could leave them floundering if rates increase.
That’s the one that Andrea Benton, a 37-year-old entrepreneur in North Vancouver, B.C., said hits her family of four hardest.
“It means my total family income would have to be an exorbitant amount to afford an $800,000 house,” she said.
The changes in mortgage rules over the past few years have made owning a house less desirable, she said. While she understands the government’s intent is to bring prices down eventually, she said, “It feels a little Big Brotherish to me,” and questions whether it will have its intended effect on the hot North Vancouver market.
“We’re probably going to be long-term renters,” she said. “The closest I’ll probably own anything is a condo when I’m 65.”
Ask the Globe
Will the new 25-year amortization be applied to a 30- or 35-year mortgage I already have and will need to renew soon?
Robert McLister, a mortgage broker and editor of the Canadian Mortgage Trends blog, said the new rules apply only to new government-insured mortgages after July 9. Existing mortgages with longer amortizations can be renewed as usual. However, those who increase their loan amount on renewal will have to amortize over 25 years.
I have signed a purchase deal with a 30-year mortgage amortization that closes after July 9. Do I need to renegotiate?Mr. McLister said a 25-year amortization will not be required in such a case. However, he said people will need to go back to their lender if they have a mortgage commitment based on a 30-year amortization and have just begun house hunting.
Can I still use a 30-year amortization if I have a down payment of 20 per cent or more?
Mortgages with this level of down payment do not need insurance and thus aren't covered by the new rules. However, Mr. McLister said some lenders will most likely offer a maximum 25-year amortization for both insured and conventional mortgages.
What's happening with million-dollar homes?
The federal government says it won't provide mortgage insurance for houses in this price bracket, so buyers will need a down payment of 20 per cent in all but a few cases.