Getting a Foot in the Door: Overcoming the challenges faced by first-time homebuyers
Due to a perfect storm of significant housing price appreciation, tight rental conditions, stagnant wage growth and stricter mortgage regulations, prospective first-time home buyers are facing multiple challenges in their attempts to save a down payment and qualify for a mortgage.
In fact, according the 2016 census, nearly 40% of those aged 20-35 in the Vancouver area still live with their parents. While the reasons for this large cohort are myriad, the single greatest challenge faced by this group is overcoming the incredibly high barriers to home ownership.
“We are seeing people who are older and have opted to rent longer,” says Troy Resvick, President of the Canadian Mortgage Brokers Association – British Columbia (CMBA – BC) “We’re also seeing the other side of that, where family is assisting them to get into the market.”
“With most detached houses in Langley priced above $750,000, finding a home that first-time buyers can afford is a daunting task,” says Resvick. “Either adjust your expectations significantly, or let’s talk to the Bank of Mom and Dad.”
Resvick is referring to the increasing trend of parents digging into their savings or securing reverse mortgages in order to gift a down payment to their children.
‘Stressful’ tests
Amid the backdrop of a hot real estate market in the Lower Mainland, the Office of the Superintendent of Financial Institutions (OSFI) applied new regulations requiring both insured and uninsured borrowers to be “stress tested” before a mortgage can be approved.
“Some clients are finding they’ve been re-priced,” said Resvick. “They can get less money now, so that means shopping for a less expensive home. It’s significantly reduced British Columbians’ homebuying power.”
For others, it means they’re out of the market entirely, unless a relative is able to chip in with a monetary gift. Some buyers are even moonlighting at part-time jobs to save for a down payment, while others pool funds with family members or even friends to buy a home.
“It’s getting harder and harder to get into the market these days,” confirmed Reza Sabour, a CMBA – BC Director. “A combination of factors is keeping buyers out of the market.”
According to Sabour, stress tests take can 20 per cent off a buyer’s purchasing power. That means people are forced to “drive to qualify,” meaning they are looking further afield for housing, even if that means a much longer commute to work.
Credit Clean-up
So, what can first-time homebuyers do to increase their chances of qualifying for a mortgage?
According to industry experts, it starts with getting your financial house in order – and that means cleaning up your credit.
“Lenders look at credit, and paying your bills on time,” said Suzanne Fleur de Lys-Aujla, a Director of CMBA – BC and Co-founder of Women in the Mortgage Industry.
“If you have great credit, then when you go to the lender it helps support the rest of your file. Managing your debt, for example not having a car payment, helps you get more mortgage.”
“The optics of a file have never been more important than they are now, said Rob Regan-Pollock, Senior Broker at Invis in Vancouver. “A good broker would be able to convey to those buyers what they should do to improve their credit rating. If there is high utilization on one credit card, figure out a way to reduce it to 50 per cent of your limit, for example. Ideally, we don’t want to see any credit pressure for first-time buyers.”
Lenders want to see stability, especially when it comes to employment history, and are increasingly assessing applicants based on financial risk models.
“Credit has never been on the forefront of the application as it is now,” said Sabour. “Credit history determines the rate you get, the product, the amortization, etc. So clean it up, and don’t go under any large financial obligation or consumer debt before you get your mortgage.”
Options and Assistance
In the past, a five-year fixed mortgage was the “go-to” for first-time buyers, but Sabour noted that new buyers are now leaning toward shorter terms with longer amortization – up to 25 years with less than 20 per cent down, and up to 30 years with a 20 per cent down payment or greater. Despite rising interest rates, variable rate mortgages are increasingly popular, as they often come with a lower monthly payment than fixed rate mortgages.
By Samantha Gale, LLB – CEO of the Canadian Mortgage Brokers Association – British Columbia
Here is a link to the Government of Canada web site that charts the "Final Revised Guideline B-20: Residential Mortgage Underwriting Practices and Procedures" :
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Mortgage Stress Test: What it means for you and your clients
If the high price of real estate, the lack of inventory or the prospect of higher interest rates didn’t scare us, the news of a so-called ”stress test” for hopeful home buyers sure did.
On January 1, 2018, the Guideline B-20 that is used by federally-regulated mortgage lenders, will require the minimum qualifying rate for uninsured mortgages to be either the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus 2% – whichever is greater.
The rationale behind this change is to further guarantee that if interest rates rise, which is expected, home owners will still be able to make their mortgage payments.
These new guidelines mean that even if your clients can get a mortgage for 3.5%, under the new rules they will be assessed as though they are paying 5.5% interest before they get any mortgage at all. This is what Ottawa was referring to as the new “stress test.”
The Superintendent of Financial Institutions (OSFI) announced its revisions to B-20 Guideline for Residential Mortgage Underwriting Practices and Procedures in October, which has led to anxious speculation that up to 20 per cent of people who apply for mortgages with Canadian banks will be turned away next year. Either that or they will be required to lower their expectations substantially for the kind of home they want or need.
The new rules are aimed more at uninsured mortgages which are those with a high (above 80 per cent) loan to value (LTV) ratio.
A loan to value ratio represents the amount of a mortgage lien divided by the appraised value of the property. For example, if your client borrows $92,500 to purchase a home valued at $100,000 their LTV ratio would be 92.5 per cent. Mortgages with a LTV ratio above 80 per cent need to be insured, and those are the mortgages that will be more difficult to get under the new guidelines.
Here are some of the high level requirements in the new B-20 Guideline:
- If a buyer was approved for a mortgage already, the new rules won’t affect them.
- Banks are expected to honour existing pre-approvals issued under the old rules until those pre-approvals expire.
- Individual lenders can choose which rules to impose on pre-approvals issued between October 17 and December 31, 2017 so it is strongly recommended that borrowers confirm the conditions of pre-approvals with their lenders.
- Starting January 1, 2018, if a buyer gets a mortgage from a bank, all loan applications or pre-approvals occurring after that date will be subject to the new rules. There are no exceptions, even if the purchase agreement was signed before the new rules were announced.
Because Canadian banks are Federally-Regulated Financial Institutions (FRFI) they are obliged to conform to the B-20 Guideline. And OSFI will audit banks to ensure the Guideline is being followed. Credit unions, mortgage investment corporations, and private lending companies are not subject to the same federal regulations.
Mortgage Professionals Canada is an industry group representing close to 12,000 mortgage brokers, lenders and insurers. In July this year the group published Consumers’ Perspectives on Home buying in Canada. The report indicated the new stress test will mean close to half of Canada’s potential buyers will be subject to the new preapproval terms. When hopeful home buyers were asked what they would do in response, they indicated a few options:
- 45% would increase their down payment amount
- 45% would buy a less expensive home than hoped for
- 20% would buy a home further away than originally intended
- 39% would delay their purchase
However, the study also noted: “There are multiple factors in play in the housing market at present and it is too soon to draw conclusions on the impacts of the stress test policy.”
Critics of the new mortgage rules have pointed out that instead of dampening the risk from over borrowing, the new guidelines will simply drive people to borrow from private lenders that charge higher rates and come with less friendly terms. If that is true, it could defeat the government’s stated purpose to lower the risks from consumer debt.
As for credit union lending, Samantha Gale, CEO of Mortgage Brokers of BC, says that given credit unions are an alternative source for loans, they could become overwhelmed by the demand and simply run out of funds with which to finance mortgages.
On November 28, BCREA Chief Economist Cameron Muir made the following prediction:
“A rising interest rate environment combined with more stringent mortgage stress tests will reduce household purchasing power and erode housing affordability.”
He continued: “The 5-year qualifying rate is forecast to rise 20 basis points to 5.15 per cent by Q4 2018, and the new qualification rules for conventional mortgages will erode purchasing power by up to 20 per cent. Given the rapid rise in home prices over the past few years, the effect of these factors will likely be magnified.”
On December 14 CREA issued a press release that says British Columbia is projected to record almost 9,000 fewer sales in 2017 due to “an erosion of housing affordability” resulting from tighter mortgage regulations and higher interest rates. CREA says the average price of a home in BC is forecast to remain steady in 2018.
As with any new government regulations, there will be a period of adjustment as all the players — from the buyers and sellers, to the Realtors and brokers, to the lenders and the lawyers—do what they can to work with the rules and still achieve their goals.
Gelderman.ca Real Estate Team
RE/MAX Aldercenter Realty
RE/MAX Aldercenter Realty
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