Estimating how many will be impacted by new mortgage rules

by Justin da Rosa26 Oct 2016
Agents have been wondering just how wide-spread the impact of the new mortgage rules will be, and one leading economist has crunched those numbers in his assessment of the new stress test requirement.

“The spring 2015 report by Mortgage Professionals Canada found that on average home buyers borrow 76% of their approved mortgage amounts,” Will Dunning, chief economist with Mortgage Professionals Canada wrote in his report, Slamming on the Brakes: Assessing the Impacts of Changed Criteria for Mortgage Qualification. “For first-time buyers the figure is 81% … thus, if the maximum approvable mortgage loan was equal to about 5.5 times income, the average first-time buyer would obtain a mortgage at 4.5 times their income.

“Therefore, with a test at the 4.64% posted interest rate, an average buyer might still be able to obtain their desired amount of financing and complete their desired purchase.”



However, 60% of first-time homebuyers borrowed 80% of more of their approved amounts and, under the qualification standards – which now require buyers who take out an insured mortgage to qualify at the posted rate, currently at 4.64% -- many would not have qualified for the home they ultimately purchased.

“Some might have been able to increase their down payments, so that they could complete that purchase. Others might have been willing and able to purchase a less expensive property, such as a smaller home or a less expensive location,” Dunning said. “But, if more people are chasing lower priced homes, more of them will be unable to find something that meets their needs and for which they can get financing. In short, some of these buyers would not be able to make sufficient adjustments and they would not make any purchase.”

Crunching the numbers of those who would be impacted is difficult due to a lack of strong data, according to Dunning. To properly assess the impact, we would need to know the number of applicants who weren’t tested against the posted rate but would now be required to.

We would then need to know what percentage of these people would now be unable to purchase under the new regime.

Still, Dunning does draw some conclusions by looking at which buyers would be most impacted – those taking out high ratio mortgages and those taking out portfolio-insured mortgages.

He states:

Looking at the two factors noted above:
• From the Mortgage Professionals Canada survey (spring 2015) we can infer that up to 60% of first-time buyers will be unable to complete the purchase for which they would previously have been qualified. Some of these will make adjustments and still be able tobuy; some will be removed from the market.
• Some low-ratio buyers will be removed from the market.
• An opinion estimate is that one-quarter to one-third of home buyers will have previously been tested on their actual rate but will now be tested on the posted rate.
• A further opinion estimate is that among this group, one-quarter to one-third will be removed from the market.
• Combining those two factors, the expectation is a 6-10% reduction in housing activity.

To read the full report, click here.

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COMMENTS

  • by Don j 10/26/2016 2:48:12 PM

    The article fails to include the chain effect of first time buyers - each first time buyer in Halton generates the foundation financing for approximately 6 sales in a chain. That means if we loose 300 first time buyers that will stop or significantly delay 1800 home sales - that will more then wipe out excess demand and could kick us into a downward spiral as supply builds - it won't stop long term demand however as more and more buyers pile up on the sidelines looking in - what we need is reduction in red tape and taxes on new home construction to built an extra 50000 homes to get a balance back in supply and demand

    Also what is going to happen to all the first time buyers with deposits on homes awaiting completion in 3027 and 2018?? What happens if they do not meet new financing criteria

    Maybe we should be demanding government of Canada and Ontario have to do pass an enhanced stress test allowing for higher interest rates before they can engage in deficit spending. Indeed a 700billion debt at fed and 359bil at Ontario means a 2% interest rate jump will cost an extra 20+billion of interest we the tax payers must pay or 700$ for every man woman and child in the country

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