The Canadian housing market has seen its share of turbulence since Trudeau took office in November of 2015. The Liberal government has taken an aggressive stance on cooling down real estate in Canada’s largest cities. Rates have been mounting, and borrowers are finding it harder to qualify for loans.
New rules are continually being implemented to prevent an affordability crisis, which is linked to the rising price of Canadian homes in certain areas. Data from Canadian Real Estate Association (CREA) suggests that houses in the Greater Toronto Area experienced over 20% increases from 2016 to 2017. According to Trudeau, the escalating prices are making it much harder for Canadians to own homes.
Since Ontario released it’s Fair Housing Plan and 15% non-resident speculation tax, the GTA and Vancouver already saw some drop in housing prices. Despite that, the Liberal government intends to lower prices further. So, new mortgage rules are expected to take effect in early 2018.
The new OSFI rules are geared towards the majority of homebuyers. Anyone applying for a loan with a down payment of 20% or more will be affected. The new changeswill require applicants to qualify for the five-year benchmark rate by the Bank of Canada, which is currently 4.99% or 200 basis points above the borrower’s current rate — whichever is higher.
Many mortgage professionals think that these changes will really impact the real estate industry and home affordability should continue to decrease. As a result, consumers will have to adjust their expectations of the home they can afford and qualify for.
So, how will you fare with the new mortgage changes? Here’s our prediction for how the 2018 Canadian mortgage rules will affect the market: For some, the changes can provide many opportunities. For others, the regulations can be troublesome.
With the new OSFI rules, home prices are expected to drop. This is particularly true for full-sized houses and homes outside of dense city cores. Expensive properties will be difficult to buy due to the tougher qualifying criteria. Thus, if you own property in surrounding areas, like North or West Vancouver, Edmonton and the GTA, it might not be the best time to sell.
Meanwhile, the condo market is expected to see an increase in demand. Due to the impact felt on larger properties, many buyers will have to consider to opt-in for condominiums instead. Condo owners should see an increase in their property valuations with the inception of these new rules. In the coming year, condo sales are going to be quite a commodity.
Mortgage brokers have an interesting road ahead. Many mortgage professionals will feel frustrated by these regulations. To survive with these new rules, brokers will have to take a hard look at their business strategies.
Mortgage professionals that have the majority of their business with big charter banks will have to diversify. They will need to find more alternative lenders, credit unions and privately sourced financing solutions for their clientele. That means many professionals will have to expand their scope to meet the needs of their clients.
However, brokers should see an increase in inquiries for this reason. This new landscape could provide an opportunity for many brokers to stand out from their competition. In many ways, mortgage professionals will be forced to become financial advisers. The more knowledgeable mortgage brokers are about managing finances, the better they will fare in the year ahead.
Some of the previous changes have been detrimental to alternative lenders, but the new rules could provide some relief for them. Those that have managed to withstand these implementations will see an increase in business. With the new regulations, many brokers will have to fund mortgages through non-traditional channels.
Industry professionals speculate that lenders will start to offer longer amortizations to better serve consumers, reverting back to 2010 and earlier, when banks offered 35 to 40 years. Going forward, it’s important for alternative lenders to streamline their qualification criteria. As more business is driven to them, regulators might tighten the lending rules over alternative channels.
Private lenders will likely see the most increase in business from this rule change. Since these lenders acquire their funds from a range of sources, (from individual investors up to capital pool corporations) they will have more flexibility with their lending procedures. During these times, many homebuyers are willing to pay more to forego the headache of applying for a traditional loan — but only as temporary solution.
Many new and seasoned homebuyers will be overwhelmed by the new rules. Starting in January 2018, no matter how large the down payment, everyone will be assessed under the new criteria and undergo the same qualifying procedures. Therefore most consumers will have to buy at least 20% less of a house then they could before the new guidelines.
Consumers will also have to change how they view mortgages. Those who went directly to the bank for a loan may now be inclined to employ brokers. They will require the help of a professional to figure out all aspects of borrowing. This includes figuring out what is needed to qualify through traditional channels, what their alternative options are and how to perfect their credit.
The Canadian mortgage industry is destined to undergo more turbulence from this correction. Although chances of approval are lower at the bank, overall demand could be increased as home prices drop. This should stabilize property values for a short period of time. The likeliness of increasing rates is leering in the not-so-distant future, which could claw back the housing demand.
More approvals will be obtained through the broker channel due to the shift in business. This could be especially beneficial for private lenders until OFSI takes over regulation from FSCO. In the interim, the transfer of business will give opportunities to ambitious brokers who are well versed in finance management. Overall, Canadians will be paying the same, if not more, for the same house with a lower value. It seems that these changes don’t quite benefit the consumers in the short or long term.