As of January 1st, every borrower needs to pass a new “Mortgage Stress Test” (MST) to qualify for a mortgage loan at a bank. And it won’t matter how much downpayment you have. Even if it’s 20% or over, you’ll still be subject to the MST. Once you pass the test, you’re not required to actually make a 20% down payment - you can still take advantage of a lower one and a lower mortgage rate. But first you have to pass 'the test'.
BREAKING IT DOWN
If and/or when interest rates increase, the Government wants you to prove you can afford payments at an interest rate higher than the actual rate in your mortgage contract.
The MST has been typically applied to insured mortgages, in which the borrower had paid less than a 20% down payment, but now it's for every mortgage.
Guess what? Credit unions are not bound by these new rules, but that may change as, they've followed the banks, in the past.
The main effect will be felt by 1st time buyers because, no matter how much money anyone puts down, they still have to pass this stress test.
WHAT ARE THE NEW QUALIFYING RATES?
The current qualifying rate for uninsured mortgages (ie: with 20% or more down) is either the Bank of Canada’s present 5-year fixed rate of 5.14% OR 200 basis points above your contractual mortgage rate. So, if you’ve been awarded a 3.45% mortgage rate, you now have to ‘qualify’ for a 5.45% one. If it's 3.2% your qualifying rate is 5.2%. If you've received a 2.1% qualifying rate, even though adding 200 basis points is only 4.1%, you'll be required to qualify for the posted rate of 5.14%.
THERE'S EVEN MORE TO THE MST.
To lenders, affordability translates into two things: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). They use these 2 mortgage formulas to determine exactly how much money they are willing to lend you.
The maximum GDS ratio, you can have is 39%, and TDS is 44%. (Note: while the guidelines state your GDS should be no more than 32% and your TDS should be no more than 40%, most borrowers with good credit and a reliable income will be allowed to exceed these guidelines.
What is Gross Debt Service (GDS)?
A GDS ratio is the percentage of your income needed to pay all of your monthly housing costs, including mortgage payments of principal, interest, taxes, utilities, and real estate taxes.
You’ll also need to include 50% of your condo maintenance fees, if applicable. Your GDS has to be 39% or lower to qualify for the mortgage.
To calculate your GDS ratio, you’ll need to add all of your monthly housing-related costs and divide it by your gross monthly income. Then multiply that sum by 100 and you’ll have your GDS ratio.
What is Total Debt Service (TDS)?
Your TDS ratio is the percentage of your income needed to cover all of your debts. The debt ratio formula calculation is the same as for your GDS, except all of your monthly debts are taken into consideration. This includes car payments, credit cards, alimony, and any loans.
To calculate your TDS ratio, add all of your monthly debts and divide that figure by your gross monthly income. Then multiply that sum by 100 and you’ll have your TDS ratio.
Your GDS and TDS ratios allow lenders to know if your income will cover the cost of your mortgage. If your GDS & TDS are higher than 39% and 44%, respectively, try and lower your debt before seeking out an 'alternative' lender. Those alternative (also known as 'shadow' lenders) will have higher interest rates plus higher loan fees. No lender is judging whether or not you deserve a home. They're looking at you as a potential risk and calculating that they can collect the money you’ll owe them. Over the long-term.
In addition to the GDS and TDS, there are other basic expenses like transportation and food. So you want the ratios to be as low as possible to account for these other costs.
WHAT CAN YOU DO TO LOWER YOUR GDS/TDS RATIOS?
- TDS/GDS: Make a greater down-payment, which decreases your mortgage debt and monthly mortgage costs.
- TDS/GDS: Increase your (gross) household income.
- TDS only : Reduce your current debt obligations (such as car payments, credit card interest, pay down/off credit cards.)
WHAT IF WE'RE REFINANCING?
If, on renewal, you stay with your existing lender, then you don’t have to pass the MST again. However, if you change lenders at mortgage renewal time, you may very wekk have to qualify and pass it. Lenders are thrilled about one thing: customer retention. As many as one in six people, renewing their mortgage, could be trapped at their existing bank because they can't pass the new stress test at another lender. And if a bank knows you can't leave, it may very well offer sub-par rates.
Last week, the Bank of Canada hiked the interest rate another quarter point to 1.25%—a seemingly superficial number depending on which part of the country you’re in.
The housing demand in Canada’s three largest cities is so great that removing a handful of buyers—as the new mortgage rules and interest rate increase will do—will have a negligible impact. However, in cities like Edmonton and Calgary, they’re recovering markets and this change will be harder to absorb because their housing supply is higher than the demand. Markets in St. John’s and Regina will be affected the most.
The new mortgage lending rules are estimated to reduce purchasing power by 15-17%.
However, the quarter-point increase based on a fixed-term mortgage works out to about $12.50 per month on every $100,000 of mortgage It’s not that much, especially in Toronto where the inventory levels are so low. And it likely won't affect the condo market at all. In the past 6 months, along with the previous increases, it amounts to a total of $25 per month for each $100,000 of mortgage.
One market that emerged from 2017 relatively unscathed is Montreal, as demand is still strong and there wasn't any government intervention. Prices in Montreal surged & oeven utpaced Toronto & Vancouver's last year, but they're still more affordable because they tried to curb demand instead of getting more supply.
With the combination of the new labour law, tax laws and new mortgage rules, both Buyers and Sellers, are going to be cautious and it will take two or three months for us to see the actual impact on the market.
No, you haven’t read the title incorrectly.
The phrase “Mortgage Pre-Approval” has 2 distinct, different meanings. I always want you to have a preliminary Mortgage Pre-Approval before we look for a residential home for you to purchase. This 1st type of pre-approval, is really a personal financial pre-approval (not on a specific property), based on your income, asset to debt ratio, credit history and report, amount of your anticipated down payment and other criteria. This kind of pre-approval is determined by your credit worthiness and how much of a mortgage the financial institution is willing to give you. And once all this is determined, only then can you know what interest rate you ‘qualify’ for. Plus, then we know how much we can actually spend to purchase a residential home: the total of the amount of the allowable mortgage plus the amount of your down payment.
Securing this 1st Mortgage Pre-Approval for your purchase gives you a 90 day locked-in mortgage rate. If mortgage rates go down, you'll receive the benefit of the lower rate. If mortgage rates increase, your rate will remain the same as your already approved rate. Your mortgage rate won't go up during the 90 day locked-in period. If you want to purchase a home within the next 90 days, and with mortgage rates having just come down, NOW is the time to get your pre-approval and lock-it in. You can initiate discussions with your own financial institution which may or may not offer you the lowest interest rate out there or you can work with one of my trusted Mortgage Brokers who actually has the financial institutions/banks bid for your individual business with the lowest possible mortgage rate available. This 1st Mortgage Pre-Approval is the initial major step towards buying a home or we could be out there blindly looking at real estate properties that are too expensive for us. Or perhaps we have greater buying power than we thought we did. Of course, we don't have to spend the highest amount you're approved for - I always want to find you the most real estate value for the least amount of money. But, the way prices are so high right now, we have to figure out what's really financially in your comfort zone. It's not 'just' a mortgage payment you're committing to, we need to take into account your land transfer fees, moving costs, legal costs plus ongoing home maintenance, property taxes, and utility costs to name a few.
Now for the 2nd Mortgage Pre-Approval. This is approval for a specific property and takes place when you’ve found the residential home you want to purchase, we've made the offer and it’s been accepted by the Seller. Whenever possible, for your benefit, I include a Financing Condition in our Offer. This condition states that we have a certain number of days (usually 3 or 4) to ensure that we can get the required amount of mortgage for the particular home that we've just purchased. During these 3 or 4 days, your financial institution will (most of the time) conduct an appraisal of the home you’ve just bought, to ensure that it’s really worth what we’ve agreed to pay for it. And in all years as a Realtor I've never had a financial institution tell one of our clients that the residential home they’ve just purchased isn’t worth the amount they’re spending. Why, you ask? It’s because I am absolutely diligent in advising you if you’re offering more than the property is truly worth. I always want that appraisal to agree with our purchase price. Once the bank appraisal has come back with a positive report that, indeed, at this purchase price, you will get the mortgage you were approved for in the 1st Mortgage Pre-Approval, we can waive the financing condition towards firming up the purchase of your new home.
One phrase: “Mortgage Pre-Approval” – 2 different meanings/scenarios. If you’d like even more of a detailed explanation or further information just give me a call. I'm always happy to share, with you, as much information as I can. And no real estate question is too small or too large!
It's definitely going to be a while.
Currently the general public can’t access Toronto's past home sale prices without the help of a Realtor. For privacy, it's controlled by the Toronto Real Estate Board (TREB). But that might very well be changing.
A 2016 Federal Court ruling which ordered TREB to end its strict controls on some housing data has recently been upheld, despite an appeal. Canada’s competition commissioner had argued that TREB’s practices were stifling competition and innovation. But TREB will now appeal to the Supreme Court to reverse that decision.
The database of the Multiple Listing Service (or MLS) is run by the Canadian Real Estate Association. Anyone has access to the list prices and addresses of homes currently for sale on Realtor.ca. Realtors, though, can share with their clients, a more comprehensive version of these listings including historical sales and the most recent ones, as well as homes that never sold.
Realtors have respected the privacy of home owners by only sharing this information privately. So, anyone who is not working with an agent, can’t acces this data. The Competition Commission argued that this ties the hands of agents who want to market this private information to consumers. In 2016, Canada’s Competition Tribunal agreed and decidede that TREB can’t prevent agents from sharing sale data on their own websites.
The benefit? Realtors can advise clients when prices were reduced in their desired neighbourhoods, track the number of homes selling above or below the list price, and offer faster property valuations. Consumers could use the information to determine the current value of a home they wanted to buy, without needing to ask a realtor directly for help.
TREB argued that allowing such free access to this data violates privacy and copyright legislation. But the Court of Appeal continues to maintain that TREB’s restrictions were intended mainly to hold onto a competitive advantage for its own Realtors, by creating a market where they’re the best resource of past/current, accurate home sales.
TREB is now appealing to the Supreme Court which may or may not be allowed. And until a final Supreme Court ruling, TREB will block the release of any data and it will definitely take many, many months to determine. Now, the national industry behemoth, the Canadian Real Estate Association, has intervened signaling that there could be grave national consequences.
Toronto Real Estate Board President Tim Syrianos announced that Greater Toronto Area REALTORS® reported 7,374 transactions through TREB's MLS® System in November 2017. This result was up compared to October 2017, bucking the regular seasonal trend. On a year-over-year basis, sales were down by 13.3 per cent compared to November 2016.
New listings entered into TREB's MLS® System in November 2017 amounted to 14,349 – up by 37.2 per cent compared to November 2016, when the supply of listings was very low from a historic perspective.
"We have seen an uptick in demand for ownership housing in the GTA this fall, over and above the regular seasonal trend. Similar to the Greater Vancouver experience, the impact of the Ontario Fair Housing Plan and particularly the foreign buyer tax may be starting to wane. On top of this, it is also possible that the upcoming changes to mortgage lending guidelines, which come into effect in January, have prompted some households to speed up their home buying decision," said Mr. Syrianos.
The MLS® Home Price Index (HPI) composite benchmark price was up by 8.4 per cent on a year-over-year basis in November 2017. The average selling price for all home types combined was down by two per cent compared to November 2016, due in large part to a smaller share of detached home sales versus last year. On a year-to-date basis, the average selling price was up by 13.4 per cent compared to the same period last year. High density home types continued to lead the way in terms of price growth, with the average condominium apartment price up by double-digits compared to November 2016.
"Changes in market conditions have not been uniform across market segments. In line with insights from consumer polling undertaken by Ipsos in the spring, we are still seeing seller's market conditions for townhouses and condominium apartments in many neighbourhoods versus more balanced market conditions for detached and semi-detached houses. We will have more insights to share about consumer intentions for 2018 at the end of January when TREB releases its third annual Market Year in Review and Outlook report," said Jason Mercer, TREB's Director of Market Analysis.
Legally known as the Non-Resident Speculation Tax (NRST), this new tax is 15% on the purchase or acquisition of an interest in a Residential (only) property in the Greater Golden Horseshoe by individauls who aren't Canadian citizens or permanent Canadian residents. It is also applies to foreign corporations and taxable trustees. This NRST tax is in addition to the Ontario Land Transfer Tax. and, in Toronto, the Toronto Land Transfer Tax. The legislation,is retroactive to April 21, 2017 however binding agreements of Purchase & Sale signed prior to April 21, 2017 are exempt.
This tax includes the purchase of single family residences, detached, semi-detached, townhouses and condominium units, duplexes, triplexes, fiveplexes and sixplexes. It does not pertain to multi-residential rental apartment buildings with over 6 units, agricultural, commerical or industrial land.
Even if only one of the Buyers or Transferees is a Foreign entity, the NRST payable applies to 100% of the value of the consideraiton for the purchase or transfer.
The NRST doesn't apply when a person purchases or acquires a residential property as a 'Trustee' of a mutual fund trust, real estate investment trust or specified investment flow-through trust.
The NRST can be exempt to a foreign national who receives confirmation under the Ontario Immigrant Nominee Program, as long as they are confirmed under the program at the time of the purchase or acquisition. It can also be exempt for those who are conferred with the status of "Convention Refugee" or "Person In Need Of Protection" (Refugee). Another exemption can be if a foreign national has a spouse who is a Canadian citizen, permanent Canadian resident or a 'nominee' or 'refugee'. However the exemption doesn't apply if there are more than the foreign national and the spouse on title.
REBATE OF THE NRST TAX
A Rebate can occur if:
- within 4 years of the date of purchase/acquisition the foreign national becomes a Canadian citizen or permanent Canadian resident or
- the foreign national is a full time student for at least the last 2 years from the date of purchase/acquisition in an 'approved institution' as per the Ministry of training, Colleges and Universities or
- the foreign national has legally worked full time in Ontario continuously for 1 year since the date of purchase/acquisition.
To be eligible, the foreign national must hold property ONLY with his/her spouse and be used as their principal residence for the time period.
To read more please visit: http://www.fin.gov.on.ca/en/builletins/nrst/nrst.html
Toronto's 2017 May/June market is very interesting: "Inventory" for sale is up (as is every spring); "sales" are down (more for buyers to choose from) yet prices have still increased year over year. There's no real reason for the slowdown in the number of properties sold. It's a 'healthy adjustment that isn't triggered by anything'. The interest rate hasn't changed/increased, and we're not in a recession. So the question is "Why?"
Home sales in Toronto dropped to 10,196 in May, down 20.3 per cent from last year with detached home sales leading the decline at 26.3 per cent.
However, supply for sale, saw a 42.9 per cent jump from 2016. Condo inventory though was lower year-over-year, and remains tight. .
“Home buyers definitely benefitted from a better supplied market in May, both in comparison to the same time last year and to the first four months of 2017,” said Toronto Real Estate Board president Larry Cerqua.
“However, even with the robust increase in active listings, inventory levels remain low. At the end of May, we had less than two months of inventory. This is why we continued to see very strong annual rates of price growth, albeit lower than the peak growth rates earlier this year,” he added.
CIBC chief economist Benjamin Tal indicates that market conditions were already changing before the introduction of Premier Wynn's Fair Housing Plan.
“I think that is exactly what the doctor prescribed – what we need is a slowdown that is not triggered by anything,” Mr. Tal told The Globe and Mail, adding that the adjustment is healthy. He added that there is not an interest rate spike or recession that could see a crash.
According to TREB’s HPI benchmark index prices were up 29% year-over-year The average selling price increased by 14 per cent across the whole area to $863,910.
Everyone is asking whether Wynn's Ontario Fair Housing Plan has had an impact on sales in Toronto. TREB’s director of market analysis Jason Mercer comments cautiously:
“The actual, or normalized, effect of the Ontario Fair Housing Plan remains to be seen. In the past, some housing policy changes have initially led to an overreaction on the part of homeowners and buyers, which later balanced out,” he says.
He adds that the jump in active listings appears to be homeowners taking advantage of higher prices, having delayed selling, perhaps because they still expected prices to rise.
Not having your own Real Estate Agent to perform due diligence could land you in a horrible situation and losing thousands of dollars.
You may have heard about two recent condo projects in downtown Toronto having been converted into ‘rentals’ with 181 innocent buyers of a complex on King St. West, near Liberty Village, out as much as $40,000 each. Another condo project, “The Selby”, at Sherbourne and Bloor, abandoned their plans, as well.
As your Realtor, I look to discover information not disclosed or made available when you walk into a developer’s Open House Site Office promoting their brand new spectacular, out of this world, absolutely astounding new construction condo. If, unfortunately, you don’t know the questions to ask, they’re not obliged to say anything. And more often than not, the sales people hired by the developer, to ‘sell’ have no clue either.
I’ve represented many of my clients who are either buying new construction to live in or invest/flip out. With my indepth knowledge and many years of experience ,I delve into the deep corners of what’s really going on behind the scenes. I don’t want you to have the kind of experience these unsuspecting purchasers have had.
As one recent example, I accompanied my Clients to an exclusive luxury townhouse project they were interested in. As I always do, I asked the on-site Representative many questions. The answers I got, or rather didn't get, were concerning. The Developer's Representative could not give me definitive responses on anything. While my Buyers were excited about the prospect of what the house was going to 'look like', my professional intution told me to advise them to very wary. The deposit structure was out of proportion to what a fully funded project would require and, for 4 years, would tie up more of my Buyer's money than what should have been necessary. After we left, I explained my concerns, and I was grateful that they heeded my advice. Within 5 months, the project went under and was abandoned. The deposits of other unsuspecting Buyers, to date, has not been returned.
If you’re thinking of taking a walk down ‘new construction aisle - whether condo or freehold", please call and let me help you - so you don't end up taking a negative & losing walk on the wild side.