First-Time Home Buyers: Mortgage Update June 2020
In spite of recent headlines about stricter mortgage rules, first-time homebuyers may have a unique purchasing opportunity. Current challenges of buying a home include:
- The minimum 5% down-payment (for homes under $500,000) and qualifying for the mortgage stress test;
- The stress test of using a 25-year amortization and the greater of the contract rate plus 2% or the posted benchmark rate (whichever is higher).
The posted benchmark rate has fallen from 5.14% at the start of 2020 to 4.94% now which helps those looking for a mortgage. Yet many first-time homebuyers are wary of entering the market. They continue to make their monthly rent payment of $1,200, or higher, but say to themselves: “I could be putting this rent payment toward a mortgage payment and have my own home.”
First-Time Home Buyers: The Outlook to Purchase May Be Improving
In addition to the above challenges for first-time homebuyers, a recent announcement from CMHC further impacts insured mortgages (those with less than 20% down payment). Effective July 1, 2020:
- Maximum Gross Debt Service (GDS) ratios will be lowered to 35% (from 39%)
- Maximum Total Debt Service (TDS) ratios will be lowered to 42% (from 44%)
- The minimum credit score needed to qualify will rise to 680 (from 600) for at least one household borrower
- Many non-traditional sources of down payment that “increase indebtedness” will be banned
Industry analysts estimate that the above changes will mean that about 5% of home buyers will no longer qualify for a mortgage.
BUT DON’T DESPAIR, THERE IS GOOD NEWS: In reality, the CMHC changes will have no immediate impact on first-time homebuyers as the other two mortgage insurers (Canada Guarantee and Genworth) have both confirmed that they are NOT planning to follow CMHC in making lending rule changes. Fortunately, mortgage lenders will have the option of sending those mortgage applications which don’t meet the new CMHC lending guidelines to either Canada Guaranty or Genworth.
First-time homebuyers should be ready to take advantage of a price correction:
For many years, the prices of homes in the GTA have continued to rise. No one knows for certain, but the Covid-19 pandemic could be the catalyst to lower home prices. Last month the head of CMHC, Evan Siddall, issued a gloomy forecast if Canada doesn’t recover “sufficiently” from Covid-19 and he forecasted the following events:
- Home prices could fall from their peak by 9% to 18% over the next year
- Mortgage deferrals could jump to 20% from 12% by September
- Mortgage arrears could top 20%
- Canada’s debt-to-GDP ratio is estimated to rise from 99% pre-COVID to 130% by Q3
- The debt-to-disposable income ratio “will” soar from the current 176% to 230% through 2021
Homeownership can be yours sooner (hopefully)
While no one has a crystal ball, if the CMHC forecasts are accurate then first-time homebuyers may have the chance of a lifetime to realize their dream of homeownership. Consider this scenario:
Should home prices drop on average by 15%, the minimum down-payment of $20,000 on the previously assessed $400,000 home, would decrease to $17,000 on the home that now costs $340,000. Assuming an insured 5-year fixed mortgage rate of 2.35%, 25-year amortization, the monthly mortgage payment will decrease from $1,741 to $1,480.
The above 15% drop in the average selling price, would result in a $3,000 lower down-payment and a reduced monthly mortgage payment of $261. For first-time homebuyers, this would be very positive news.
If you have any questions about homeownership, please contact me at (289) 314-8786.