New Mortgage Rules to Pinch Vancouver Homebuyers

Vancouver house hunt | BCBusiness
New restrictions on CMHC mortgages from Ottawa will make hunting for affordable homes in Vancouver that much more difficult.

The Canadian Mortgage and Housing Corporation’s tighter restrictions mean more Vancouverites will be pushed out of an already pricey housing market.

The Internet is abuzz lately with debate on the speed and depth of the housing price correction in Vancouver. Some discuss the high price/income ratio being the harbinger of the bubble. Others suggest the ratio (while important) cannot cause a massive pricing slump without a recession to push it along.

The reality is that the market has been slowly self-moderating. As I’ve mentioned before, sales are down and when sales go down, so do prices. Supply and demand are in an eternally linked dance. Interest rates are at record lows, but buyers still sit and, even allowing for seasonal correction, sales are down. That may change a bit in the next month as September is the next most active sales period. But will the Canadian Housing and Mortgage Corporation’s new restrictions further erode (or advance) sales in short term? 

The fed has decided it’s time to watch how much we spend on our houses and introduced four major changes to government-backed lending to keep us from overextending ourselves. As if this market wasn’t already self-regulating. The groups most impacted include those with only five per cent down payments, those with higher levels of personal debt, those who want to buy a property over $1 million and/or those who want to use the equity in their home. For example, if a first-time buyer is looking at a $350,000 condo and doesn’t have a $70,000 down payment, they may still be eligible for a high-ratio mortgage, but they can only get an amortization period of 25 years rather than 30. That affects the ceiling of the initial purchase price and will reduce their ability to buy at the top of their price range.  What, you wanted to take advantage of that high-ratio mortgage for a property worth more than $1 million?  Well, forget about it. That option is out under the new rules too. 

Those of us already committed to our investment also can’t borrow as much against the equity of our homes. Your home is no longer a cash machine as you can only extract 80 per cent of the home value compared to the current 85 per cent.

Finally, the total debt service ratio has been reduced too. That will mean personal debt levels can’t be as high as they were. So, you’ll need to have more liquid assets (cash, etc.) and that will still result in less purchasing power. This is the government’s way of ensuring Canadians don’t pile on more debt than we can handle.  The new rule is really directed at first-time buyers.  However, it won’t affect you if you have 20 per cent down.

So, what can you do as a first-time buyer?  A contract of purchase and sale must be entered into before July 9 for you to take advantage of the old rules. Preapproval doesn’t matter — you must be committed to a property. As reasonable people, does anyone really buy in the top end of their price range?  Yes, we do and we do it all the time. People buy because of their potential for future earnings.  Fifthy bucks extra per bi-weekly payment makes a difference in total interest spent, but has little impact monthly on your chequing account. 

Really, it comes back to basics. Buy what you can personally afford after you consider how you want to live your life for the next five to 10 years.  Don’t be “house poor.” Know that interest rates do go up.  Know that people do lose jobs. Know that people do make more money over time, but there are no guarantees in life. Just because someone will give you money doesn’t mean you should take it or spend it at the top end of what they will give you.