October was an interesting month for condos in Toronto and the Canadian real estate market in general. With a year-over-year average price per sqft growth of 9.7% in the GTA, and the federal government implementing new mortgage ‘stress-testing’ measures, many people feel that the dreams of first-time buyers are being crushed.
Changes to Canada’s Mortgage Rules
Traditionally, any homebuyer with less than 20% down must purchase mortgage insurance, typically from Canadian Mortgage and Housing Corporation (CMHC), Genworth, or Canada Guaranty. Once insured, these buyers would then apply for a mortgage with a Canadian bank, many of which are offering discounted 2.5% rates on average these days.
But the new mortgage stress-testing rules that the federal government implemented on October 17 requires these insured buyers to qualify for a mortgage at the Bank of Canada’s posted rate of 4.64%. That means someone with less than 20% down is being “tested” against the affordability of a much higher interest rate, and for many that means they qualify for a much lower mortgage.
Based on a 2015 report by Mortgages Professional Canada, “60% of first-time buyers borrowed 80% of their approved amounts” to purchase their homes. In other words, they had far less money than they needed to complete the purchase. Under the new mortgage qualifying rules, many of these high-ratio buyers may be pushed out of the market.
James Harrison, President and Founder of Mortgages.ca, says, “The stress-test is a little too harsh. It will negatively affect the purchasing power of insured buyers by approximately 18%”.
For first-time buyers, having a household income of $75-80,000 is pretty common, but unfortunately buying that top choice condo in downtown Toronto will be rather difficult. But even under the 4.64% mortgage rate, you can still find Toronto condos for around $350-400,000 with an approved $325K mortgage and 5% down payment. Looking for condos in Scarborough, Mississauga, Burlington, and other GTA neighbourhoods will greatly improve your options.
To afford an average condo in the City of Toronto priced at 400-450K, you’d need a household income of around $100,000 to qualify for a mortgage, if you were paying less than 20% down.
But there is some good news. James Harrison concludes, “I think Toronto as a whole will be fine and this will create a more balanced real estate market, which is a good thing.”
The New Mortgage Rules on the Brighter Side
While the new stress testing does make it tougher for first-time buyers, we think the intention behind it is a smart move.
We think the new mortgage testing should help reduce the number of multiple offers, enforcing a stricter financing decision for purchasing. “We will probably only see five offers on a property where before you might see eight or ten,” says Harrison. Realistically, people should be buying homes within a safer affordability range.
Smart buyers should not max out their mortgage limit; however, more often than not, when bidding wars start, buyers will feel the emotional pressure to max out their pre-approved mortgage amount in order to secure the purchase.
The new measures will hopefully limit the financial risks accrued if someone maxes out, as buyers will be restricted to mortgage limits they can actually afford.
Buyers should be considering the whole weight of monthly carrying costs, which includes all additional costs of ownership: hydro, maintenance, property taxes, etc. Quite often people focus their financial planning only on the mortgage payment.
We also recommend that new condo buyers take into consideration potential life changes that could halt or lower your income. Buying a home will be the biggest purchase of most people’s life, and sudden events such as illness, a loss in the family, pregnancy, or shifts in interest rates could drastically affect your ability to make mortgage payments. That’s why we always recommend working and planning with a Condo Pro, someone who can confidently help you prepare for a secure future.
Tips for Buyers Under New Mortgage Rules
For the time being, there are two real options. Either come up with more money or change your search criteria. Between the two, changing your search criteria is much easier, and Condos.ca is here to help. Our search database together with our licensed Condo Pros make the search transition between buildings, neighbourhoods, and price ranges seamless and convenient.
#1 – Change location. While you may find yourself priced out of King Street West, for instance, there are over 100 great neighbourhoods in Toronto to find condos for sale. The Condos.ca neighbourhood guides make searching and comparing different ‘hoods easy and fun, and our Condo Pros know this city like the back of their hand, benefiting from a breadth of shared experience within the GTA, including Burlington and Hamilton.
#2 – Buy smaller. If location is your number one factor, then look for a comparable price-per-square-foot but at a smaller size. Maximize the value of your space by considering the functional square footage, which means finding units that are unencumbered by hallways, alcoves, stairs, etc. Open concept designs are great for this.
#3 – Wait for the right deal. It can pay to be patient. If there is a building or a neighbourhood that you really like, keep an eye on the price-per-square-foot trends to catch new listings that may fall below the average. Condos.ca has the most current price-per-square-foot market analysis for all new listings in the GTA, and when you sign up you can get email listing alerts on your favourite buildings so you never miss a potential deal.