When
purchasing a home, the key areas that impact whether you qualify for a mortgage
at all and for how much, are based on your income, credit and debts including
your new mortgage payments and available down payment.
In July
2012 there were some significant mortgage legislation changes that impacted
qualifying for a mortgage including using a higher interest rate to qualify
depending on the term you select, more income verification and down payment for
the self-employed as well as lowering the amortization to 25 years. All these changes impacted mostly those that
have less
than 20% down payment and therefore require default insurance (CMHC,
Genworth or Canada Guaranty).
Unfortunately,
there is more to come that has already taken effect with some lenders now, and
others by December 31st, 2013. All these
changes are intended to curb consumer debt accumulation over and above income
levels and to reinforce the importance of ensuring that borrowers do not over
extend themselves financially with more debt than they can handle.
Overall,
these changes are a good thing to ensure consumers don’t overspend and become “house rich and cash poor”; meaning
being a home owner but living pay cheque to pay cheque with so much debt
(including credit cards, loans, lines of credit etc.) that there is no extra
cash for savings to build a financial cushion should there be an income loss in
the future.
The
downside is that these changes are impacting the ability for many to qualify to
purchase a home, especially impacting first time home buyers who are struggling
to find an affordable property that they qualify for close to where they live
and work.
So what are
the new changes coming into effect by December 31st, 2013 and how
will they affect your borrowing and purchasing power? The changes fall into three categories which
are focused on your debt to income ratios and this will determine how much of a
mortgage you qualify for;
1. Debt; The payment that must be
considered when calculating how much you qualify for is now a minimum of 3% of
the outstanding balance on all unsecured lines of credit and credit cards that
you have. Even if you have a lower
minimum monthly payment required by the creditor, this will no longer be
used.
For secured lines of credit that
are registered against real estate, a minimum monthly payment that is to be
factored into your qualifying is now the outstanding balance calculated over a
25 year amortization using either the benchmark rate (5.34% as of Sept 12th,
2013) , or the actual interest you are paying.
Even though your secured line of credit might only have a minimum
payment of interest only, you now have to qualify using a much higher payment. Some lenders are taking this one step further
and using the “credit limit” instead of the outstanding balance.
How to overcome this challenge; if you pay your entire balance off
each month, and can provide confirmation of this, then you will not be impacted
by this change. Work with me on your
personal household budget so we can create a plan to pay down your existing
debt to a point where you qualify for the mortgage you require
2. Guarantors; if you can’t qualify for a
mortgage on your own, often a guarantor can be added to your application. The guarantor is not on title but is on the
mortgage and typically doesn’t live in the property with you. The new changes mean that you can no longer
use the income of the guarantor to help qualify for the mortgage unless they
will be living in the property with you.
You will now be required to prove you can afford the property without
using your guarantor’s income as well.
How to overcome this challenge:
Ensure that you purchase a home and obtain a mortgage that you can actually
afford to pay back on your own without any financial contribution from a
guarantor. You may have to adjust your
wish list a bit, or purchase a more affordable home to get you onto the
property ladder.
3. Heating Costs; using about $75 to $100
per month to calculate the cost of heat in your qualifying has been the norm
til now. Changes now require that a
higher amount than this be used as determined by the lender and will be based
on the purchase price, size of the property and location.
How to overcome this challenge:
The reality is you are most likely going to be paying more than $100 per
month on heat and utilities anyway so ensuring you can afford these bills is a
good thing before you buy the
home. When you find a property you want
to buy, ask the existing home owners for copies of the utility bills over the
last twelve months so you can see what it will actually cost to heat your home
thru the entire year. Of course, your
usage might change from the existing home owners but at least you will have an
idea. Again, ensuring you can actually
afford to pay the utility bills before you purchase the home is good.
These
changes, along with recent rising interest rates, are impacting the amount
borrowers qualify for which in turn determines the purchase price of a
home.
So what
happens next? Firstly, don’t panic as
these changes may not impact your particular situation at all. If you are considering either moving and
purchasing a bigger home or purchasing your first home, call me for a free consultation
to see exactly how these changes may impact your qualifying for a
mortgage. There are many strategies we
can discuss together to make your dreams of home ownership an affordable
reality.
Be prepared
for these changes so you we can create a clear plan and path to home ownership
for you.
Ronald Ephard
Mortgage Broker
rephard@tmacc.com
6
months, 1 to 10 years
