We had blogged about the new mortgage borrowing rules that went into effect January 1, back when it was first announced (here). We just wanted to give you a specific example of what this means and what impact we expect it to have on the market. Just to be clear, the new rules only affects homebuyers who have 20% or more in down payment. Homebuyers with less than 20% down payment will not be affected - there will be no change in the amount of mortgage you qualify for.
A quick refresher before we get into the example: as of January 1, homebuyers will need to qualify at their current mortgage rate plus 2%, or the average 5-year posted bank rate of 4.99% (whichever is higher). By using this stress test, banks will ensure that the borrower would still be able to repay their loan under pressure, should the interest rates climb higher than the current average. This means that the new stress test will automatically reduce your borrowing capacity by, at least 18.5%. This percentage could be greater if your pre-approved rate is further off from the posted 5-year average. We really liked these examples that were given on the Rampone-Marsh Mortgages blog (link to the article below) and wanted to share them with you.
Assuming you have been pre-approved for a $300,000 mortgage.
Reduction = (Current pre-approval * minimum reduction)
Reduction = ($300,000 * 0.185)
Reduction = $55,500
New loan capacity = $244,500
Assuming your family earns an annual gross income of $100,000, and you plan to buy a home 20% down. You have been pre-approved for a loan of $726,939 at a 5 year fixed mortgage rate of 2.83%.
Under the new mortgage stress rules, you will need to qualify at the benchmark rate of 4.89%. Now, your family can only afford a home worth $570,970— a budget cut of $155,969!
The article link we provided also has a mortgage calculator if you want to crunch out the numbers.
We think that the new borrowing rules will have quite the effect on the market and that steep correction we have been hinting at over the past couple of months might very well be here. Only time will tell...