In US politics, an “October Surprise” refers to a significant and “unexpected” event that changes the course of an election.
While our elections are in the books, many homebuyers in Canada just got an October Surprise of their own when applying for their mortgages.
As of Oct 17th, buyers who require insured mortgages (typically those involving a down payment of less than 20%) need to qualify at the Bank of Canada’s Mortgage Qualifying Rate (MQR), which is currently 4.64%. This is roughly double the current mortgage rates.
While these buyers won’t have to pay a 4.64% rate on their mortgage (so their month-to-month costs won’t increase), the higher qualification rate will reduce the maximum mortgage that the bank will approve.
In some cases, dramatically.
Generally speaking, this may reduce the max purchase price for many buyers – specifically first-time buyers who typically don’t have a 20% down payment – by as much as $100,000 or more (depending on their income and down payment, of course). So, if you were approved for a $600,000 purchase price on Oct 16, you may only be approved for $500,000 today.
WHY IS THIS HAPPENING?!?
With mortgages rates being at historically low levels, this is a government measure that works to ensure that buyers will continue to be able to afford homes if the interest rate increases. In other words, they’re working to prevent mortgage defaults. The likely-intended byproduct: reduced demand for homes through reduced affordability, cooling the market.
How may this impact the Waterloo Region market?
There are some who predict this will cool our local market, since many first time buyers may now need to wait for a few more years and improve their financial position prior to entering the market. That’s a straightforward assessment and, yes, some buyers – especially ones purchasing their first home – will opt to wait.
But will it really cool the market? Let’s look at a few other possible outcomes:
Waterloo Region becomes MORE of a magnet for GTA buyers. Sure, it’s been talked about ad nauseam this year, but you would have to think the migration of GTA buyers to our region would only increase with these new rules. If KWC homes are now less affordable, the same goes for GTA homes. This may force GTA buyers our way, where homes are still much more affordable.
First-time buyers may adjust their expectations and buy anyway. Since a buyer’s first home is typically not their “forever home”, they may simply adjust their expectations and buy a smaller property with the goal of building equity through home ownership. Despite the higher qualification threshold, they can still get a low 5-year fixed rate that allows them to pay off more principle.
Increase in renters. If more first-time buyers decide to rent for a few more years, our region would become even more attractive to real estate investors. Demand for rental properties would increase.
These new rules apply to buyers in all cities, not just ours. As a result, we still provide out-of-town buyers with incredible value – maybe even more now that these rules are in place.
If our rental market heats up, a first-time buyer may be wise to switch to a wealth building mindset and purchase a small townhouse, build equity while mortgage rates are low, then rent it out down the road when they can afford their “forever home”.
These rules will likely impact our market – but not necessarily in a negative way.