In October 2016, the mortgage rules changed for Canada, making it a little more difficult for first time home buyers to purchase a home. Mortgage lending rules were changed last year to limit the amount of money that Canadians could borrow so that if interest rates were to rise, the monthly mortgage payment could still be made by consumers. Basically, first time home buyers may now have to purchase a smaller home or spend less than they previously planned to buy.
New Plan Details
With the new rules, a stress test is applied to borrowers who have opted for a variable rate mortgage or a fixed rate mortgage that has a term of five years or less who have less than 20% to put as a down payment. This means that borrowers who fit this criteria will need to qualify for a mortgage by using a higher interest rate than what they will be paying for the mortgage. Essentially, buyers will now be paying more and will have to buy less home.
The goal of the new plan is to see potential home buyers qualifying for higher interest rates to ensure the buyer will still be able to make their monthly mortgage payment if the interest rate were to increase along with covering other costs associated with a new home. For example, a new home owner may be looking at a loan interest rate of 2.5% but must qualify for 4.64% due to the new rules. This new interest rate qualification will lower the amount the new buyer can spend on the home in order to meet the higher interest rate number.
Because of the new rules, lenders may turn borrowers down if they barely qualify for a loan or need a co-signer. A larger down payment may be required, which can lead first time home buyers to wait until more money can be saved for a down payment. Individuals who have less than 20% to put down will now be qualifying for a lot less money for a home than in the past, which can be off-putting if you have dreamed of owning a particular home. A down payment calculator can be used to help you determine how much is needed to put down in order to qualify for a particular loan. A mortgage broker will be able to help you determine what your options are in this regard.
Working with a Professional Broker
Because the new rules can be confusing, it is important that first time home buyers work with a professional mortgage broker. Working with a knowledgeable individual will allow the first time home buyer to find the right mortgage option for their home buying needs, ensuring loan qualification and finding a quality home in the process. As a first time home buyer, you may have had your heart set on a particular neighborhood and the price point of homes in the area may not allow you to meet the new mortgage criteria. An experienced broker will be able to look at your finances and find the right loan type for you to be able to afford the home. Or at least point you in the right direction for a first time home mortgage.