Starting today, new rules to tighten qualify for FHA mortgage. Many people are frustrated that they can not buy the house they want. But is this really bad news? For future buyers who make their budget before going to the bank, this is a non-new.
The real estate world is vast and complex, but here I want to focus on what it changes for your home project. I will not talk about Vancouver, Toronto, or foreign investors. I will not talk about banks, private lenders or real estate and mortgage brokers for whom these measures are not very pleasant. I will not talk about Boomers who are afraid of selling their homes at a crazy price to finance their underfunded pension.
I will talk to the first buyers in Montreal, Quebec or Beauce. Those who are either shopping for their first home or in their first qualify for FHA mortgage term.
To start, let’s put some order in this new measure which is far from being abstract.
The big picture
$ 292,839: Average price sold of a house in Quebec in 2016.
- 5%: Minimum down payment required to buy a house.
- 20%: Down payment to save yourself from mortgage insurance (eg CMHC).
- 2.7%: Current average interest rate displayed (you can get better by shopping).
- 4.64%: Average interest rate for the last 5 years calculated by the Bank of Canada.
- 44%: Maximum total debt- to-mortgage ratio to qualify for FHA mortgage.
All mortgage terms, except 5 years closed : Your debt ratio should qualify with the average interest rate (4.64%), if your down payment was less than 20%.
Closed 5 year term: Your debt ratio only needed to qualify for FHA mortgage rate offered by your bank (regardless of your down payment).
After (what changes)
All mortgage terms will need to be qualified with the average interest rate (4.64%), if your down payment is below 20%.
That’s all. Nothing else. It’s not a revolution. It’s an adjustment.
Why Qualify For FHA Mortgage?
The ultimate goal of qualification is to ensure that buyers have the ability to repay their mortgage, despite rising interest rates.
And to do this, the debt ratio is very telling. It calculates the percentage of your gross income (!) That is incompressible following the ac hat of a property . You have already made commitments and others will be added by buying the house. You will have to buffer on the rest to arrive.
- Just to be clear, the rest that is considered compressible expenses includes things like:
- Your food, your grocery store, what your kids eat
- Your bus pass, your gas, your insurance, your plates, the garage, etc.
- Internet, telephone, cable (lol) / Netflix
- Your life insurance
- Holidays, parties, Christmas, children’s activities
- The tax payable … (because the calculation is based on gross income)
- Things always fun and easy to compress …
And also, although this is not its primary purpose, this little test gives an indication of the resilience of your finances in case of income reduction. Such as when you fall in QPIP after the arrival of the first baby, like many first buyers. Or when you are unemployed, like 13.4% of Millennials now .
There are plenty of reasons that could lower your income in the next 5 years. Just as it is possible that interest rates rise even slightly.
You need some leeway.
Anticipate . Prevent . Protect yourself .
Why are we changing the rules now?
Simply put, we legislate to make sure people get mortgages they can really afford. Not those they think they can afford.
I am mostly focused on individual empowerment. When you think about it, why would the state come to define what is good for me? Who would decide what I can or can not buy?
This philosophy assumes that all buyers act in a completely rational way. They monitor their finances, make their budget, manage their level of debt, spend according to their abilities and not their desires.
All things that the average Canadian does very, very little. And often very badly. Do I have to remember that he has an average debt ratio of 167.6%, the highest in the OECD ? And while sales of new vehicles are constantly increasing . That the savings rate does not exceed 5% for almost 20 years and peeps in 2016 .
In short, we will go back to the premise of economic science that economic actors are rational.
As a result, far too many Canadians do not bother to calculate what they can actually afford. They let the financial institutions tell them. Because it is well known, the banks are like an old boyfriend: it knows what is good for you, it works in your interest …
It might be a good idea to recall an important nuance. A financial institution does not want to know if you can afford your house. She is trying to find out if she can get paid. Quit looking for money where you least like it. Where does it hurt you the most? Very little affects him in your life.
It is not doing one’s self-service to get into debt in the throat to buy a good that is accompanied by an increase in our expenses. This is true for a car. This is also true for a house.
These rules are a return to reality. In life, we buy what we can afford. Not what we would like to be able to afford.
Lucky the newest buyers?
Lucky those who have recently bought a home, but who today could not qualify for FHA mortgage with the new measures? Frankly, I do not understand, I do not know how they sleep at night.
Fortunate? No. Insomniacs or unconscious? Very likely.
Think about it,
For a $ 250K 2.5% mortgage over 25 years, they currently pay $ 1120 / month. At 4.64%, the payment barely rises to $ 1403. And they can not absorb a rise of just $ 283. Their debt ratio is too high.
I cross my fingers not to have their refrigerator fart.
And I pity them when the city will send them their real estate revaluation, on the rise, based on the price of their purchase.
Follow-up of the welcome tax (transfer taxes).
They are not lucky to have passed just before the bell. They are hyperness. They bought an asset at a price they should not have because they do not have enough strength.
Of course, they’ll be fine. Very, very few people will lose their home when rates go up. The vast majority will find one or more solutions.
Settle in the mortgage margin, ie transfer a debt from a low rate to a higher rate.
Rebalance the car loan balance on the next (smaller) to decrease payments. This amounts to refinancing a debt for an asset that we do not even own anymore.
Decrease their RESP / TFSA / RRSP contribution . The first steps to impoverish his future.
Only make minimum payments on credit cards. OMG …
Maybe sell and change house. So pay a brokerage commission of 10-15-20K $, plus the notary of 1K $ plus the rights of mutations 2-4K $, etc.
In short, push forward a problem that will catch up hard, impoverish them, or poison the daily life of their financial life, so personal.
So, those who do not qualify, what do they do?
They will have to take note of this reality check : The house they coveted is too expensive. Or they are already too indebted. Or most of the time, both.
They are not too much indebted because of the new measures. The house does not cost more because of these. All that existed before but, like many Canadians, they did not realize it.
The good news is that those who will have to juggle these new measures will have an excellent incentive to clean up their personal finances. Some will have to:
Review the type of house they coveted. (Smaller always bigger, it’s not the end of the world.)
Stop taking repetitive auto loans and keep your vehicle already paid.
Clean up their consumption habits and review their purchasing behavior.
Pay off their debts.
Increase their RRSP contributions to receive the HBP
In short, things that everyone should do on their own, without the need for the government to legislate.
Angry, maybe. But it’s for the better in the long run.
I will agree with you and say that the real estate market has become increasingly inaccessible to our generation.
It’s frustrating for those who can not afford a home after so many years of schooling or savings and will have to wait.
But frustration is never a good counselor. Do not be mad at these new measures. Be angry at:
The neglect and bad political decisions in real estate for 20 years.
Buyers who always want bigger, more expensive, as they do with their self.
The disproportionate swelling of sellers who still think their house is worth gold and push prices up.
The federal government has put CMHC into mortgage risk, and has encouraged banks to lend money to anyone else, pushing prices up as well.
In fact, if such measures had been put in place long ago, house price inflation would have been better controlled. Household debt too. We would be in a better situation today.
And we would have avoided a lot of people getting caught in their own margins up to their necks…