Yesterday, OSFI (The Office of the Superintendent of Financial Institutions) announced some new rules to tighten up the real estate market. These rules will affect anyone putting 20% as down payment or more on a home. Currently, anyone purchasing a house over a million dollars will have to put a down payment of at least 20% to qualify for a mortgage. Those who spend less than a million dollars and put down less than 20% have been experiencing this additional stress test for the last year.
So, what is the stress test? It’s when they qualify you for a mortgage instead of qualifying you at a 3-year interest rate, you’ll now have to qualify at a 5-year fixed rate, currently 4.89%, whether you plan on getting a shorter term mortgage or not.
What does this mean for you?
What this means is that a couple with a joint income of roughly $125,000 could have previously afforded a $1 million house with a 20% down payment. With the new stress test, they could only afford approximately $825,000 now with that same $200,000 down payment.
Let’s look at another example. In order to purchase a house for $1.4 mill, a couple would need a household income of $170,000. After the stress test is applied, their affordability goes down to $1.15 mill.
For someone looking to purchase a home for $1.2 mill, their affordability would drop below $1 million. As you know, there are very few homes in Toronto available for less than a million.
This will push many people entirely out of the housing market and into the condo market. Something we saw last year when they applied these same rules to those putting down less than 20%. It drove more people into the condo market In the last year. Condo prices have increased significantly compared to the housing market.
The affordability levels will drop to roughly 15-20% less than what someone could afford to purchase previously. Now, I’ve helped a lot of people buy homes. I can tell you that someone who could have afforded $1.4 mill will not be happy with the kinds of houses they would now have to consider at the $1.2 mill level. I call that champagne tastes on a beer budget. Everyone wants what they can’t have and this additional stress test has simply made matters worse.
And if someone was going to sell their house for $1.4 mill, would they suddenly be willing to accept $1.2 mill? I doubt it.
The new rules come into effect on Jan. 1st. Until then, buy whatever you can now. If you have a property to sell that’s over a $1 mill, now is definitely the time to sell because your buying pool just shrunk significantly.
The Average Household Income
What’s the median household income in Ontario according to Statscan? For 2015, it was $89,550. That’s not individual income. That’s household.
According to the CBC article; Wealthiest 1% earn 10 times more than average Canadian, “The very rich are 272,600 Canadians who make up the top 1% and make more than $191,100. I don’t know how many people you know with those income levels.
The gap between the haves and the have-nots is huge and growing. These additional stress tests, in my opinion, unfairly re-enforce that by not allowing those with a lower income to get ahead in life by purchasing real estate. Why is it that when some people reach a level of success, like those in the government, they want to stop others from doing well too?
January 1st will be a very unfortunate day for man. So if you were ever considering buying or selling and you have 20% down payment, clearly now is the time. There are 2½ months left to take advantage of the current market conditions.
Need help deciding what to do? Now is the time to consult with your bank or mortgage broker to find out how you will be directly impacted. I can certainly pass you onto mortgage brokers. If you are interested, just let me know.