So you might be ready to take the plunge or you’re thinking about buying your own house one day. You’ve developed good spending and saving habits. You’ve paid your bills on time and handled your credit wisely to build up a good credit rating. You’ve saved a decent down payment and have even been pre-approved so you have an idea of what you can afford.
What you might not be aware of is new regulations that were recently introduced by the federal government that could mean rethinking what you need to do to get the mortgage you need.
Under the new rules, first-time homebuyers will need to show they can handle mortgage payments if interest rates go up – or if your income is reduced (think layoff, disability or parental leave). In other words, first-time buyers with a mortgage insured by Canada Mortgage and Housing Corporation will be ‘tested’ against the higher five-year posted bank rate even if you get a better rate from the bank. Right now that Bank of Canada rate is 4.64%. If you have less than 20% of the down payment, you will have to get the mortgage insured AND ‘stress-tested’.
No big deal right? Well, these new regulations mean your buying power is reduced visit this web-site. Let’s say you have an income of $70,000 and have a $500 monthly car loan. With the old rules, your 5% down payment would qualify you to buy a house listed at about $370,000 with a five-year fixed mortgage rate of 2.44%. Now, the stress test would calculate your ability to pay the mortgage at the Bank of Canada rate of 4.64% effectively changing how much house you can afford to buy – about $280,000.
What does that mean for first-time home buyers? For some, it may mean you have to rethink the type of house you buy or location. It could mean saving a bit longer for a larger down payment and you might need to rejig your spending habits or get a part-time job. Talk to a financial advisor about your intentions and they can help you come up with a plan that works for you. Another option – wait until you make more money – maybe now is a good time to ask your boss for a raise.