New lending rules to pose challenges to first-time home buyers
The decision by federal government to tighten mortgage lending rules will have a direct impact on first-time home buyers in Ottawa, Canada. The new lending rules will set a limit on the amount that many Canadians can borrow to ensure that they can be able to make their payments when mortgage interest rate rises.
According to Frank Napolitano, a managing partner at Mortgage Brokers Ottawa, the new rule is expected to reduce the amount of mortgage that many first-time home buyers can qualify for once it is effected on Oct 17th thus, scaling down the type of home many buyers may have planned to buy.
A stress test that had early applied to the borrowers who had preferred for variable or fixed mortgages of less than 5 years terms has now been revised to apply for all home buyers with down payment of less than 20%. Therefore, borrowers will have to qualify for their mortgage using a higher interest rates compared to the amount they will be paying for their mortgages.
The special offer rates advertised by Canada’s big banks for a five year fixed rate mortgage is about 2.5% although the stress test rates are posted at 4.64% by the Bank of Canada. The new lending rule is aimed at ensuring that home buyers have the potential of meeting their obligations of mortgage payment as well as other home ownership related cost.
For instance, a Canadian earning $70,000 p.a and having a 5% down payment with $500 a month in a non-mortgage monthly debt such as car loan would qualify to buy a house worth $370,000 based on a five-year fixed-rate mortgage of 2.44 per cent, under the old rules. Conversely, the same person is estimated to qualify to buy a home worth $280,000 under the new stress test using 4.64 per cent.
According to Jason Scott, a broker with Mortgage Group in Edmonton, the more stringent rules would affect many clients and therefore will not have qualified for their mortgages. It was not a wonder for nervous lenders to turn down the borrowers who couldn’t afford to pay the required larger down payment.
As per Napolitano, this would mean that buyers would have to buy for less expensive property, save for a larger down payment or wait until the future when they will be earning more.
“I think it’s going to take some people out of the market. There’s no question that some young Canadians that had aspired to buy a home, may have been ready to buy the home this year, but now I think they may have to wait.” Napolitano added.