What does the new mortgage rule mean for first-time buyers?

On October 17, 2016, most first-time buyers will have less borrowing power when it comes to being approved for a mortgage. Whenever less than 20% is put down on a home, the mortgage needs to be insured. The new rule states that every insured mortgage needs to undergo a “stress test” to ensure the borrower will be able to afford the payments if interest rates increase.

So how does this affect first-time buyers? One of the most difficult things about purchasing your first home these days is coming up with the downpayment, especially if you live in downtown Toronto. Even if your annual household income is large enough to be approved for your desired amount, having the money to put down is a struggle for numerous reasons (student debt, soaring rent prices, a generally high cost of living etc.).

According to mortgage broker Dave Larock, what borrowers can afford is going to drop about 18% (he told CBC). Larock considers the “average” first-time buyer to be a couple living together and making approximately $80,000 a year combined. Let’s see what they can afford today compared to after October 17th.

If these average first-time buyers have an annual household income of $80,000 and put down $40,000, then they could probably get approved for a maximum price of $520,000. Once the rule is in place, that same couple will only get approved for a maximum price of $425,000.

Even with today’s rules, most first-time buyers aren’t making enough money to purchase a low-rise home, new or resale. The average selling price of a detached home in the 416 area is nearly $1.3 million, according to the Toronto Real Estate Board (TREB). As of the end of August 2016, the average price for a new low-rise home in the GTA was $931,506, according to the Building Industry and Land Development Association (BILD).   

On homes priced $1 million and up, you legally need to have 20% down, so these mortgages aren’t insured, meaning the new rule doesn’t apply. Clearly, the GTA’s condo market is going to feel the strongest impact.

Here are 2 things first-time buyers have to look forward to:

1) Renting a bit longer

The stress test isn’t applied to your application if you put down 20%. There’s the possibility that you will qualify for a higher maximum price if you wait it out and put down more money.

The rental market is already getting out of hand though, what with the amount of bidding wars that are occurring. If you think it’s crazy that people are paying tens of thousands and hundreds of thousands over asking price for a home, you should be incredibly shocked that prospective tenants are scrambling to outbid each other.

After October 17th, many condo investors generating rental income will find that their tenants are happy to sign another one-year lease (or maybe an even longer lease).  

2) A potential drop in prices? 

One positive way to look at this situation is that there is the slight chance that prices in the new home market and resale will drop to accommodate first-time buyers. This will only happen if sales drop significantly and sellers and developers realize that if they want to sell, they need to cater to first-time buyers.  

When it comes to average price growth and number of sales in the GTA, the condo market is probably the healthiest segment, so you probably shouldn't hold your breath waiting for prices to drop. There’s also the small chance that sales stay strong without first-time buyers and condo prices actually surge as a response to prospective buyers that have 20% to put down.

Will this rule affect the GTA’s housing market? Of course. Is it the right approach? We’re not sure. First-time buyers already have a hard time purchasing, now it will just be more difficult.