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fall mortgages

Home shoppers seeking an insured mortgage face a higher standard in proving they can afford the payments, under new federal rules. First-time buyers and young families are particularly affected.Ben Nelms/The Globe and Mail

When Sarah Webb and her boyfriend, Jon Evans, began the hunt for their first house in their native Saskatoon this year, they saw some places they liked and many others they didn't. Both aged 23 and unsure of exactly what they wanted in a new home, they figured they weren't in any rush and decided to stop looking for a while.

The couple started the search again in the fall. Then the federal government's new mortgage rules came in.

In an effort to cool overheated markets in Vancouver and Toronto, Ottawa's new regulations demand that lenders "stress test" borrowers' ability to repay loans at interest rates that are higher than current ones. The rules, which took effect on Oct. 17, require those who are applying for an insured mortgage to show they can afford to pay it back at the Bank of Canada's five-year fixed rate of 4.64 per cent. That's about two percentage points higher than the rates now being offered by the country's big banks.

For Ms. Webb, an elementary-school teacher, and Mr. Evans, a plumber, the new test triggered its own stress.

"When we heard about the new rules coming in, we weren't just going to go out and buy the next house we saw," Ms. Webb says. "We went to the mortgage broker to see whether we should stop looking if we weren't going to be able to afford a house any more, or keep looking. We did the numbers and we would still be approved, but only for $350,000 – that would be the absolute maximum – whereas before, we could have gone up to $375,000."

The difference of $25,000 may not sound all that significant, but for the Prairie pair, the reduction in the amount they're able to borrow will have a real impact. Several of the houses they had been eyeing favourably were all around the $360,000 mark. "Now we don't have that leeway at all," Ms. Webb says. "It's harder now that we can't go over $350,000.

"Before, we were hoping to find a house that was renovated on the inside and the outside, whereas now we're probably going to have to find something that's been partially renovated and we will have to put a little bit of work into it," she adds. "We've had to shift our thinking."

While the new rules affect anyone who's in the market for a mortgage, including growing families who want to upgrade from a condo or a smaller home to a larger, detached house, first-time buyers are the hardest hit.

"First-time buyers lost a lot of their purchasing power and will have to curb their expectations on their first home," says Kari Calder, a realtor with Century 21 Fusion in Saskatoon. "This isn't necessarily a bad thing to keep buyers from overextending. … It does drive some buyers completely out of the market, though, which is unfortunate as now they will be forced to rent for longer even when they had the down payment saved up."

The changes are a littler harder to take in cities like Saskatoon, where sales of condos could go up with people having less means to buy a house, Ms. Calder says, compared to other cities.

"These new regulations are affecting buyers in markets that did not need to be cooled per se," Ms. Calder says. "Our market has been steady and relatively balanced, so by no means anything like Toronto and Vancouver.

"As real-estate professionals, we were all taken by surprise and disappointed with the way this was addressed, as it was so quick. It didn't give a lot of active buyers a chance to respond except to panic purchase before the Oct. 17th deadline or completely change their search criteria to a lower price range. It also forced some buyers out of the market completely."

Aside from forcing buyers to drop their target price, the regulations could affect them in other ways, says Bill Whyte, senior vice-president and chief member experience officer at Meridian Credit Union. "Borrowers will be forced to bring more equity to the table by waiting longer to purchase," he says.

He notes, however, that some lenders, including Meridian, were already doing stress tests based on debt-service ratios to help clients avoid being overstretched. "We also look at the mortgage applicants' overall affordability, taking into account things like day care and overall living expenses … to ensure our members can afford the home they buy."

Possibly, the rules could result in more people opting to share a home via dual mortgages. "In the past, we've set up mortgages with two couples or families who choose to share one home and are now in the process of launching this as a mortgage option," Mr. Whyte says. "It's a fiscally responsible way for consumers to get into the market."

More buyers affected by the changes may need to go to the Bank of Mom and Dad, if it exists, to borrow money for a 20-per-cent down payment. "I have found that parents who are in a position to contribute to their children in this way are doing it more now than before," Ms. Calder says.

Glen Melnyk, a consultant with Investors Group in Winnipeg, says that the government's move is simply making official what many reputable lenders had been doing for years anyway, implementing stress tests in an effort to prevent clients from becoming house poor or worse, unable to make their mortgage payments. However, he says that now that the regulations are in place, it's more important than ever for first-time buyers to see how their mortgage payments fit into the bigger financial picture.

"Mortgages are part of the financial plan, and you need to massage the plan as you go along," Mr. Melnyk says. "You want to mitigate tax, build wealth, manage risk, and pay off your debt. We try to take a holistic approach.

"When you're borrowing, people can get into trouble, even here, living beyond their means," he adds. "At some point, that is going to come crashing down. Anchoring a mortgage to a financial plan is important because it's not just: Set it and forget it and see you in five years. There are so many variables and unplanned life events that come up. A financial plan is a moving target. In the end, your financial future is not up to the government. … It's up to you."