Effective January 1st, purchasing real estate will be impacted by the new mortgage laws, as unveiled in October by Canada's Office of the Superintendent of Financial Institutions. As per said rules, potential future homeowners looking to borrow money will be subject to a stringent stress test as part of the application process. This test will seek to ensure individuals are able to continue to pay their mortgage should the interest and mortgage rates increase during their contract. While designed to cool the housing market, and act as an increased cushion and protection for lenders, it will also have other impacts, including those on buyers and sellers.
Buying Rush
If your home is on the real estate market — and you are hoping to sell it sooner rather than later — you may be in luck with your timing. Individuals who have received pre-approval for a mortgage prior to January 1st will still have the opportunity to honour said commitment and not be subject to a stress test, provided they act within the first 120 days of 2018. While this leeway period may vary depending on lending institution, generally speaking, some experts are expecting the rules to cause a "buying rush:" an influx of newly approved future homeowners will hit the streets starting January 1st to make sure they get in under their deadline. If you are a buyer during this time, be aware that there may be an increased demand for housing and an inflow of competition when it comes to securing the property that you are after.
Less House
The new laws make it mandatory for individuals, even with a 20 percent down payment, to undergo the stress test and to have the financial means to pay higher mortgage rates. This translates to individuals likely being unable to commit as much to a down payment as they may need to have more in savings and reserve to be able to pass the test. As such, buyers may be in the market for "less house," — smaller housing options, or staying put instead of moving up to the next rung on the property ladder. Some experts predict individuals will have to reduce their price range by up to 15%. This bodes well for those trying to sell smaller houses or for those with spare financial capacity who can afford the larger houses, which will now become less popular.
Decrease Demand
While some potential buyers will be forced to decrease their price range, in other instances, for certain individuals, it may take the option of a house purchase completely off the table. Some experts predict that these new laws will result in a five to 10 percent decrease in housing demand due to entry-level buyers no longer being able to afford to purchase a house. This apparent decrease in demand could also lead to a decrease in market prices, in some cases, as much as six percent. While these lower price points may then re-establish affordability for new owners, economists warn that this will only happen over a matter of years and that it will take a significant amount of time for the market to even out.
Despite the uncertainty of the impact of the new laws, there is still opportunity to purchase or sell your house and work within the means of the pending mortgage changes of 2018.
Contact one of our agents to help get a better idea on what these new laws mean for you and your house and to better understand your options when purchasing real estate.
