Canada’s new mortgage rules, aimed at tightening up mortgage lending, were rolled out last week.
The plan aims to cool hot housing markets in Vancouver and Toronto while mitigating participation losses in some of the cooler regional markets.
Vancouver has already seen a huge decline in average prices across the board, after the province introduced a foreign buyer levy last month.
According to statistics from the Canadian Real Estate association (CREA), the average Vancouver home price has already fallen $161,641 from July, 2016 when it was $1,026,207. The average Vancouver property now sits at $864,566.
Canada is considered one of the most inflated housing markets in the world, with Vancouver taking the number one spot on the Swiss Bank’s global real estate bubble index of 2016 — released in September.
The new rules, set out by Ottawa, test a borrower’s financial ability to pay a 4.64 percent interest rate, despite many lenders currently offering a lower average interest rate for borrowers. Ottawa plans to mitigate foreclosures, should interest rates rise quickly.
The new rules only apply to high-ratio mortgages, which are more than 80 percent of the sale price of the home, or in other words, less than a 20 percent down payment.
The Canadian Mortgage and Housing Corporation (CMHC) uses a 42 percent gross debt service ratio (GDS) to loosely determine a borrower’s ability to pay back their mortgage.
GDS ratio is calculated by taking the sum of principal and interest payments and property taxes for the year and dividing it by the borrower’s gross income. If the resulting ratio is below 42 percent, preliminary findings suggest the borrower should be able to afford the mortgage. Keep in mind that at this point in a borrower’s application, total debts have not yet been figured. A borrower’s consumer debt will be factored in as well, and in most cases will reduce the available funds.
On the other hand, if you take a borrower’s would-be mortgage payments across a year and multiply them by 42 percent, the result will be the borrower’s required salary as set out generally by the CMHC. Again, consumer debt and other expenses must be figured on a case-by-case basis.
To illustrate what the new mortgage rules will do to a borrower’s required income, we took national average home prices for September from CREA’s National Average Price Map and applied the new mortgage rules to the prices.
We set-up a benchmark interest rate of 2.99% and set it against the new rate of 4.94%. We used a 10 percent down payment to determine the total mortgage requirements and used general residential mill rates from each of the select municipalities’ websites to determine property tax.
On the low end, we find that in Fredericton, New Brunswick, the new mortgage rules mean that borrowers would need to qualify for just $2,453 more income.
On the high-end, Vancouverites will need to prove an additional $14,443 of income in order to qualify for the average home.
Hover over any of the bars in our interactive data visualization above to glean new insights into Canada’s updated mortgage rules.
Want even more insight into the new Canadian mortgage and housing rules? Check out Canada’s New Mortgage Rules – A Case of Unintended Consequences
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Tyler is a freelance journalist and salesperson for PG Direct Realty. He is based out of Halifax, Nova Scotia.