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How to Plan for Homeownership During Difficult Times

Guest post by Pauline Tonkin

The landscape for Canadian homeowners and buyers has shifted over the past few years. More Canadians than ever are motivated to become first time buyers due to the rising costs of renting suitable homes. However, rising property values and new stress test conditions imposed by the federal government for mortgage financing have made it more difficult to enter the real estate market. In addition, in the first half of 2020 the COVID-19 pandemic presented challenges for all buyers and sellers.

How to Plan for Homeownership During Difficult TimesWhat Is a Stress Test and How Does It Impact Financing Options?

In response to the ever-increasing debt loads of Canadians, in the fall of 2016 the federal government introduced a mortgage stress test for all mortgage applicants. A stress test is intended to help buyers avoid committing to a mortgage that they won’t be able to afford when interest rates go up. In practice, the result of the stress test was a 10% - 20% reduction in buying power, limiting a buyer to shop for a home in a lower price range. Regardless of down payment amount, credit history, income, and other factors, this was a significant change in financing rules for all home buyers.

How to Protect Yourself from Rising Interest Rates

As part of the application process, lenders must use the greater of the benchmark posted rate or the contract rate plus 2% to qualify for financing approval. The benchmark posted rate is set by the government. The contract rates are based on the market and set by the lenders.

For example, if the benchmark posted interest rate is currently 4.94% and the contract rate is 2.5%, the lender will use the benchmark rate to qualify the applicant because it’s higher than the contract rate plus 2% (4.94% vs. 4.5%). If the applicant can afford the mortgage at 4.94%, then they will have passed the stress test.

Past Rule Changes & the Difference Between High Ratio and Conventional Mortgages

Other Changes that Affect Home Buyers and Sellers

In addition to the mortgage financing changes, the real estate market across Canada has experienced further adjustments. Major cities such as Toronto and Vancouver assigned the Non-Resident Property Tax while Alberta still struggles due to challenges in the oil and gas industry. Even with these constraints the markets have been active with many buyers competing for a declining inventory of properties.

In February 2020 the federal government proposed a change to the qualifying rules rate effective April 6, 2020. Then in light of the COVID-19 pandemic, they pulled back on the proposal in March, announcing a change to the benchmark/posted rate from 5.14% to 5.04% and then 4.94%.

This change and pressure on interest rates to trend down during COVID-19 has helped generate a soft landing for real estate prices in many cities. The result has been a balanced market for motivated buyers with stable prices, low interest rates, and fewer people viewing homes, which has resulted in opportunities to buy sooner than later. Although sales of homes were down from the previous year, prices haven’t changed much and people still want to buy and sell. The forecast for the market for the second half of 2020 and into 2021 varies by source of information. However, there are early signs of recovery with increasing activity among sellers listing their properties and buyers viewing them under new protocols due to COVID-19.

Measures to Help Homeowners and Buyers During the COVID-19 Pandemic

During the pandemic, lenders and insurers (CMHC, Genworth, and Canada Guaranty) created a unified policy to address temporary loss of income for home buyers in the market, those who needed to refinance their existing mortgage, or those who needed to defer payments for up to 6 months. And efforts are ongoing.

For those who may have reduced hours for their current job, lenders will confirm with the employer that the job is still in place and expectations are for a return to full time hours in the short term. In the case where someone has a job waiting for them, some lenders and the insurers are accepting confirmation on this status from the employer as acceptable proof of employment. This is much the same as parents on leave after the birth of their child.

Lenders continue to come up with financing and refinancing specials to attract business. New programs with cash back offers, 3 free months on the mortgage, and others are available for buyers who want creative options. Your mortgage professional can tell you more.

When it comes to looking at homes, appraisers are viewing them from the exterior and homeowners are asked to take current photos and upload them to the appraiser. Lawyers are offering clients the option of onsite signings at their office with controlled procedures or virtual video signing. All measures for any real estate or financing transaction have been addressed to ensure compliance for regulatory bodies and protection for the homeowner and/or home buyer.

What Can You Expect In the Future?

Some economists forecast interest rates to remain low in 2020, and likely for most of 2021. Lenders will continue to provide financing options with consideration to the market. In addition they will maintain prudent measures in underwriting mortgage applications and be stricter on credit history and borrowing behaviour. CMHC has imposed new restrictions for high ratio borrowers by increasing the minimum credit score and limiting the debt servicing ratios effective July 1, 2020. However, the other two Canadian insurers, Genworth and Canada Guaranty, have not followed suit with these changes. First time buyers will still have options to access the other insurers.

8 Things to Know About Interest Rate Announcements by the Bank of Canada

Create a Financial Plan for Homeownership and Beyond

For individuals and families, this is the time to create a financial plan for the short term to get through COVID-19, a mid-term plan for the next 12-36 months as we move through and past the pandemic, and a longer-term plan to create a stronger financial future. Working with your trusted professionals, including a financial planner, accountant, lawyer, independent mortgage planner, and non-profit credit counsellor, now is the best time to review your current situation. Establish a roadmap for your home ownership, financing, and investments, as well as your estate and legacy planning.

Pauline Tonkin is a licensed independent mortgage advisor, known for helping her clients make informed decisions about their mortgage and borrowing options. She is committed to exceptional client service and an unwavering standard of care and respect, and welcomes your questions.