The Federal government announced new mortgage rules in October for buyers making a down payment of less than 20% of the property purchase price. These are known as “high-ratio” mortgages. Simply put, these mortgages are riskier for both the lender and borrower if things go sideways. Buyers with high-ratio mortgages are required to pay an insurance premium to the Canada Mortgage and Housing Corporation to cover any potential losses incurred by the lender should the borrower default down the road.
The new rules include a so-called “stress test”. The borrower will be tested against their ability to pay their mortgage if mortgage rates were as high as the Bank of Canada’s 5-year rate. The goal is to prevent buyers from buying too much house and defaulting on mortgage payments if their income drops or interest rates increase (which they have already started to do). Good idea on that front although this will frustrate some buyers. For some, this will mean buying a house worth tens of thousands of dollars less than they were before the stress test was initiated last month.
The conversation has long been “let’s keep up with the Joneses” or “let’s get the biggest house that we can now while rates are low and we can afford it”. Lending institutions seem to have played along. The more they lend, the more they make. Very few borrowers default or can’t make their payments so each mortgage transaction is a calculated risk. Undoubtedly, lenders have adjusted their risk assessments accordingly under the new rules.
The current model is not sustainable. It’s been reported several times that the average Canadian carries too much debt, whether it be mortgages, consumer debt or unpaid income taxes. Studies have proven that excessive debt causes long term financial stress which too often results in some form of burnout among other health issues. They need to ask for help but many do not know where to turn.
Buying a home should not be a financial burden. The costs of maintaining, heating and insuring a home must be considered by the buyers and lenders. Most carry consumer debt in the form of credit cards, lines of credit, etc. which must also be factored in the budget as do lifestyle choices. A detailed needs analysis and budget should be prepared before the decision to buy is made to ensure they are buying the right house at the right time. If you are carrying too much debt, seeing a Licensed Insolvency Trustee to review the situation and build a plan is the best place to start.
“An ounce of prevention is worth a pound of cure” once said Ben Franklin. Smart man. The new “stress test” is trying to accomplish exactly that. It is not a cure all but will likely limit the damage and potential foreclosures for some that are squeezed with too much debt. It’s a step in the right direction.
If you are burdened with debt stress, asking for sound advice is a sign of strength and the smart thing to do. Asking sooner rather than later is always better. Try our debt reduction calculator and call Doyle Salewski today for your free, no obligation consultation. You’ll be glad you did.