Attention mortgage holders and seekers: changes are coming
The process of home ownership can be like a running a marathon.
First, there’s the ‘training’ phase—as in all of the financial legwork that goes into getting a mortgage, such as the years (and years) of saving for a down payment.
Then there’s the ‘pre-qualifying’ phase, which involves finding a lender and going through a series of government-mandated hoops (i.e. the stress test and satisfying anti-money legislation) just to qualify for a mortgage.
And spoiler: not everyone makes it past the pre-qualifier round.
In fact, recent studies have uncovered that on average, only 61.3% of first-time homebuyers in Canada have had their mortgage applications approved. Not having enough of a down payment and failing the stress test were among the top hurdles for those who had their applications denied.
Home-buying 101: the lowdown on making the down payment
As for those fortunate enough to make it onto the field of home ownership.
Well, it’s not like they’d be without their own set of obstacles.
After running the first lap or two, homeowners can still face all kinds of hiccups—such as unexpected changes to interest rates, financial hardships (due to job action or loss), or the stress test once again (if said homeowner chose to change lenders at renewal time).
All of these types of challenges can make getting to that ‘mortgage-free’ finish line seem daunting.
However, changes are afoot with a goal of making this type of marathon a little easier.
If you’re a first-time homebuyer, the main hurdle you face at the onset is affordability.
While how much home you can ultimately afford will naturally depend on your household income, there are other critical factors that also play into that:
- Amortization: the time period you have to fully pay off your mortgage.
- Down payment: the amount of which will dictate the insurance structure on your mortgage loan (i.e. anything under 20% would constitute having an insured mortgage, while a down payment of 20% or more deems that it will fall into the insurable or uninsurable category).
First, let’s start with upcoming changes to the mortgage amortization period.
Currently, only uninsured mortgages can carry an amortization of up the 30 year.
As of December 15, 2024, the amortization period can be extended to 30 years, but only if:
- You make a down payment of less than 20% (i.e. have an insured mortgage)
- You’re a first-time homebuyer (applies to any type of home—new build or resale)
This leads into changes to the price cap for insured mortgages.
As of right now, the price cap on an insured mortgage is $1 million.
This means that if you were a homebuyer with a down payment of less than 20%, you would only qualify for an insured mortgage on a property with a purchase price of less than $1 million.
As of December 15, 2024, the price cap on insured mortgages will:
- Increase from $1 million to $1.5 million
- The tiered down payment structure, however, will remain the same
(i.e. you will still be required to make a down payment of 5% of the total purchase price from
$0 to $500,000 and 10% for the remaining portion between $500,000 and $1.5 million)
How does that change affect affordability for insured mortgage holders?
Well, getting back to one of the main hurdles for first-time homebuyers (i.e. having enough of a down payment), the increase in the price cap makes purchasing a home in a larger market more feasible. Especially where home prices have soared well beyond the $1 million mark (like Toronto and Vancouver).
For example, here is the difference in down payment you’d be making on a $1.5 million property, depending on your insurance status:
- Insured mortgage: $125,000 down payment required
- Uninsurablemortgage: $300,000 down payment required
Plan on putting a down payment of 20% or more? You’ll also benefit from the above change.
That’s because you’ll qualify for insurable rates, which are lower than uninsurable rates for properties between $1 million and $1.5 million. Talk about win-win.
For those of you with a mortgage renewal coming up, there’s also some welcome news on the horizon.
Remember that dreaded stress test we referred to earlier? Get ready to bid that adieu in some circumstances.
Starting November 21, 2024, the Office of the Superintendent of Financial Institutions (OSFI) will remove the requirement for lenders to apply the Minimum Qualifying Rate (aka ‘stress test’), but only under the following conditions:
- You made an original downpayment of at least 20% or have at least 20% equity in your home.
- You are choosing to switch from one lender to another at renewal time
(first-time mortgages will still need to qualify under the parameters of the stress test) - You are not in a collateral mortgage (a loan which consists of a mortgage and secured line of credit, wrapped into one—allowing your home to be used as collateral for additional borrowing)
According to Chris Knoch (Educators Director, Lending Services), the above change will be a welcome one.
“Let’s face it, the stress test is a thorn in the side for first-time and existing homebuyers alike,” says Chris. “With interest rates that fluctuate constantly, first-time homebuyers can end up confused as to how much house they’re able to afford. Existing mortgage holders, on the other hand, may feel trapped with their current lender come renewal time, simply because they don’t want to have to go through the entire stress test process again. And now thanks to this latest change, many won’t have to.”
Just like every marathon runner needs a bit of coaching and support every now and then, so do mortgage holders and seekers.
So, don’t feel like you have to this run this marathon alone.
Regardless of the types of mortgage changes that come into play or what the state of interest rates happens to be at the time—you can always count on us to provide you with educator-specific advice.
Let’s chat: have an Educators Mortgage Agent get in touch with you
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