The New Mortgage Horizon

If you don’t know the name Bill Morneau get ready to remove him from your Christmas card list. Bill is the Finance Minister of Canada and this week the nation is dealing with his brash decision that will have wide spread consequences on the housing market nationally but more specifically in the inflated markets in Vancouver and Toronto.

Let me explain the new ruling that took effect on October 17th in laymen terms before explaining the way it will impact Canadians. Essentially, any new mortgage applications (with less than a 20% down payment) will be income tested at a new benchmark rate of 4.64% instead of the current rate of 2.6%. I sat down with a mortgage broker and asked him to crunch some numbers in his mortgage calculator to give you a realistic picture of what this means. We ball parked 3 sets of numbers:

If your income is $100,000 a year, under this new income testing, you will qualify for approximately a $400,000 mortgage.

If your income is $50,000 a year, you will qualify for approximately a $175,000 mortgage.

And if your income is $35,000 a year, you will qualify for a measly $102,000 mortgage (which doesn’t even pay for wet cardboard box in Vancouver) (It needs to also be said, these are ball park numbers, you should ALWAYS see your local mortgage broker for your best solution.)

When Mr. Morneau put this new bench mark rate in place the intent was to lower house costs in the hot markets of Vancouver and Toronto. This new rate WILL bring the cost of single detached homes in Vancouver down, and everyone in Morneau’s circle will high five and talk about how smart they are and how good of an idea this was. However, since 87% of Vancouver’s real estate is made up of single detached homes, leaving 13% of the market in condos and town houses, what they seem to be blinded to is the fact that more than 50% of the population in BC will be locked out of buying single detached homes forcing more than half of Vancouverites into 13% of the market in condos and townhouses. We will see the price of condos and townhouses rise as the spike in demand will even further outweigh the supply of homes for buyers. And the ultra-rich will get ultra-richer since all the single detached homes could drop by 50% in value they’ll start buying up houses from the “bargain bin” at 2for1. Many mono lending mortgage companies that offer the best products for consumers will lose a significant amount of business and could close their doors forcing the average home owner back to the limited products and self serving “big banks” for their mortgages.

As for the rest of Canada, there are 2 big pillar’s of Canada’s economic growth; the oil sector and housing market. With the oil sector already on the ropes this latest move puts a threat to the success of Canada’s economy, not to mention in early August the government just locked out the possibility of foreign investment in the housing market. With no foreign investment dollars coming in and a bleak outlook on the oil sector be prepared for a prolonged period of very little growth and a weak economy in Canada.

I spend a majority of my time with young clients debunking the brainwashing that they cannot afford a home in the Vancouver market, but thanks to Mr. Morneau’s decision this week, it’s going to be harder than ever for young people to get into the market. With that said, it’s the best time to take control of your finances and savings to position yourself to take advantage of opportunity when it arises. There will come a time when the rules will change or the restrictions will be lifted and at that time you’ll want to have your money ready. If you fail to plan, you plan to fail.