Big changes announced Monday for the mortgage industry. Effective October 17, homebuyers with less than 20% down, looking for a fixed term of five years or more, will be required to qualify at the Bank of Canada Benchmark rate (currently 4.64%) instead of the contract rate (i.e. the current average five year fixed rate is 2.49%). This will certainly have a big impact on mortgage lending.

With mortgage rates at record lows, everyone can afford to borrow more, and when ultra-cheap borrowing costs are combined with housing markets where there is much more demand than supply, prices rise quickly. Over time, rising prices and rising mortgage debt levels feed each other in a self-reinforcing cycle, especially in places like Vancouver and Toronto, where demand has outpaced supply for some time. The longer this continues, the greater the risk that borrowers will not be able to afford their mortgages at renewal. 

To their credit, the majority of borrowers I work with are well aware of the risk that mortgage rates could be higher when they renew, and as part of our discussions, we often stress test their prospective loan to assess the cost of having to renew at a higher rate.

Here’s how this change will affect how much a buyer will qualify for with less than 20% down. Today borrowers with an annual gross household income of $69,000 and no consumer debt (ie. Credit cards, student loans, lines of credit, other property debt etc) would qualify for a purchase price of $400,000 with 5% down payment. After October 17, this same homebuyer will only qualify for a purchase price of $325,000 with 5% down payment. A huge difference for this first-time homebuyer.

If you have clients that are pre-approved, ensure you get in touch with them and their Mortgage Broker to ensure they still qualify for the same purchase price as their original pre-approval.

Real Estate Market Update

Finally, some good news: the segment of Calgary’s housing market with the greatest influence on the overall market is showing signs of pricing stability. The detached benchmark price totalled $503,400 in September, which is 3% below last year, but the second consecutive month at this price level. Steadiness in the market is a good thing with no signs the economy is turning around anytime soon.

The price stability comes from the limited supply, as opposed to 2008/09 when so many homeowners were listing their homes and flooding the market with supply.

The resale apartment market has recorded large inventory gains and a sharp pullback in sales. This, combined with additional competition from new builds, is resulting in steeper price adjustments in this sector.

Inventory levels were up 5% in September, from 2015, due to gains in both the apartment and attached sectors. Months of supply neared four months, but ranged from a low of three months in the detached sector to a high of eight months in the apartment sector.

Sales were equally inconsistent, improving by 4%, over August numbers, in the detached market while declining by 23% in the apartment sector. 

Surrounding towns are generally seeing similar results as the City of Calgary.

What’s up with rates?

Five-year Government of Canada bond yields were flat last week, closing at 0.62% on Friday. Five-year fixed-rate mortgages are available in the 2.29% to 2.39% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at about 2.49%. The most common five year fixed rate is currently 2.49%.

Five-year variable-rate mortgages are available in the Prime minus 0.40% to Prime minus 0.50% range, which translates into rates of 2.20% to 2.30% using today’s Prime rate of 2.70%. The most common five variable rate is currently Prime minus 0.30% which translates into a rate of 2.40%.

Co-written with Martin Breeze, Mortgage Broker, TMG The Mortgage Group