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Are Changes to High-Ratio Mortgage Rules Too Tough for Homebuyers?

Changes to the rules for a high-ratio mortgage may make it tougher for some first-time homebuyers to get one at all.

The regulations are meant to ensure everyone who gets one can afford their mortgage should rates increase in the near future. The housing market in Canada continues to sizzle – but are first-time homebuyers financially able to pay for their homes? This is the question that keeps the federal government continually addressing the issue.

In an effort to cool down the market, Canada introduced new mortgage insurance rules and income tax proposals last fall. Since coming to power just over a year ago, the Liberal government has voiced ongoing concern over years of low interest rates and volatile market changes. They want to know what the potential effect of the current housing finance system is going to be in the long-term. Is there a balanced distribution of risk amongst all parties in the mortgage process?

The majority of mortgage insurance in Canada is obtained through the Canada Mortgage and Housing Corporation (CMHC). As a federal Crown corporation, the government is 100 percent responsible for any CMHC mortgage insurance obligations. So, clearly last fall’s insurance changes and tax proposals are meant to help promote stability and ultimately protect taxpayers from potential mortgage loan losses.

The most publicized changes are the federal revisions to mortgage insurance regulations. As of last fall, all homebuyers seeking an insured mortgage will now be subjected to a mortgage rate stress test to see if the buyer can continue to pay the mortgage should rates increase.

Under the new rules, a stress test that had only applied to borrowers who opted for variable rate mortgages or fixed rate mortgages with terms less than five years will now be used for all homebuyers with less than a 20 percent down payment.

However, while this is good news for lenders who are always aiming to mitigate risk in the lending process, real estate critics warn that housing prices may plummet because most first-time and high-ratio buyers would now find it hard to qualify for their mortgage of choice.

In fact, the CBC recently ran a story suggesting that the number of homebuyers who qualified for mortgage insurance had dropped by 41 percent in the first quarter of 2017. This is based on the first full quarter since the changes were announced and seem to be a direct result of the federal policy changes according to CMHC.

Are the measures too broad? Global News suggests more changes are required at the local level to regulate growth in local markets, not the “broad stroke” measures introduced by the government.

Is it too early to tell what the impact from the changes to high-ratio mortgage and mortgage insurance will be?

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