New Mortgage Rules: How Will This Affect Alberta Real Estate?

Quality Retirement Transitions, Calgary

What’s Next For Real Estate in Alberta?

We were chatting with a few real estate agents this week who were wuite concerned. One has no showings this week. She had 2 last week. A few weeks ago she was doing 10+ showings a week and helping clients buy houses. She's finding it stressful working with sellers in this market, especially those with houses valued at more than $500,000. 

What’s Changing with Mortgages?

As I’m sure you may have heard by now, the federal government has decided to make dramatic changes to mortgage qualification rules in an effort to deal with the out of control housing bubbles in Vancouver and Toronto. The spill over from this will have negative consequences for the rest of the country.

This will affect both Potential Home Buyers and Current Home Owners...

First, let's look at Potential Home Buyers:

Home buyers with a less than 20% downpayment will have to qualify based on a much higher interest rate.

Example:

Imagine you’re buying a home for $450,000. You want to put down 10% ($45,000). So you need a mortgage of $405,000. Currently, based on an interest rate of 2.60 %, your payment would be -  $1837/mth. This may be very affordable for you. However, under the new rules, you have to qualify based on the possibility of higher interest rates. The number they are using is the current posted 5-year rate which is 4.54%. So, basically, you have to be able to afford the home purchase based on that rate which increases your payment to $2250/mth which is $413.00 more than what you'd actually be paying. If your Total Debt Service Ratio determines that you cannot afford to pay the hypothetical payment of $2250, you will not be approved for a $405,000 mortgage and will have to either find a cheaper house to buy or come up with a 20% downpayment. 

As a home buyer with a less than 20% downpayment, what the bank says you can afford to buy has just dropped dramatically.

An Alberta family with a household income of $80,000 and a minimum down payment of 5% would likely have qualified for a $400,000 home but now they will only be approved to buy a $320,000 home.

 

 

Mortgage specialist Peter Kinch says under the new rules, “affected buyers have about 20% less purchasing power which will put a downward pressure on the Canadian real estate market but he says the impact will be even greater in Alberta, where the slumping economy is already hurting house sales and prices.”

As a Home Buyer you have 2 options:

1.) Look for a cheaper home 

2.) Don't buy until you have saved up a 20% downpayment

What affect will this rule change have on Current Home Owners?

The immediate reaction will be to wait. Like a deer in headlights, most people don't know what to do so they will do nothing. This will slow the real estate market down quite dramatically in the next few months. It is already grinding to a halt here in Calgary.

  • Homes priced under $500,000 are still the most affordable and are attracting the most buyers - as they more easily fit into the price range for insured mortgages.
  • Home prices will face downward pressure all across Canada.
  • GDP is heading south. Real Estate sales have been one of the leading contributors to GDP for 7 provinces in the past few years. Outside of real estate, there have not been many vibrant sectors in our economy.
  • With a flat-lining of real estate values, there’s little reason to keep attempting to add value to your house through renovations. We see the home improvement industry cooling dramatically. 

What can you do as a Home Owner?

If you haven’t done so yet, set up a Home Equity Line of Credit (HELOC) or refinance now before your home’s value decreases. We have had several clients utilize this option as a part of our Cash Flow Planning Process and they are very glad they did, especially those in and near retirement. You may be wondering, "I don't need to borrow money for anything so why would I do this?" Good question! In financial planning, we like to help you plan ahead so that you create options for yourself in the future. This allows you, not the bank, to be in charge of your financial destiny. We like to call it an "Opportunity Fund". You may never use it but it is wise to set one up while you can. It is not for spending on wants and wishes or for getting yourself further into debt; it is a wealth building tool. 

Example:

We did this. Before quitting our jobs to start our own business we had all of our rental properties re-assessed to create as many HELOCs as possible. Why did we do this? First of all, we had to do it then as opposed to waiting because once we became self-employed it could be years before we would qualify to do it. We had to capitalize on that window of opportunity before it closed. Secondly, we wanted to ensure we were setting up our own "Opportunity Fund".  We wanted to make sure we had the money available to us should we come across the opportunity to buy a book of business. So far this has come close to happening 3 times and although it hasn't panned out we are well positioned for when the right opportunity comes along. We are not going to be hampered from success by a lack of planning for our future. 

How does this principle apply to you as a Home Owner?

The banks have been purposely decreasing home appraisals in the Calgary area for most of the year. Your house isn’t going to be appraised for what you think.  Lenders will want to drive down house values to help buyers qualify for new mortgages. This is the Banks' main source of income so they want to give people mortgages. 

Having a HELOC opens up all kinds of possibilities for you

First of all, for you as a Home Owner, setting up a HELOC before your home decreases in value is a wise move and costs you nothing. Secondly, if you are within less than 15 years to retirement you want to set it up because once you're no longer working you're not going to qualify to get one. Don't wait until one year before retirement. There's no guarantee you will be employed next week. As we've all seen, people all around us are being "encouraged" to retire early or are simply being laid off. If that happens your window of opportunity has closed. Don't delay.

If you are planning on staying in your house well into your retirement years having a HELOC on it opens up all kinds of possibilities for you. For example, what if you do get laid off and it takes a long time to find another job? A HELOC can get you through as an emergency fund. This removes pressure and stress from your family during an already stressful time and has a much lower interest rate that a credit card. In the case of a lay off or even in your planned retirement, having funds available via a HELOC enables you to start or buy your own business. You would have money to go back to school or take an interesting course to start a money making hobby. You would have money to buy a vacation/rental property down south which could pay for itself via rental income. You would have the choice to be on a long wait list for an important medical procedure in Canada or use the funds to travel to another county to have it done much sooner. In all of these scenarios having a HELOC available creates options when you otherwise would have none. As I already mentioned you may never use it but sure will be great to have available should an opportunity for an emergency arise. All it takes is a little planning and this is what we love doing with our clients, creating possibilities for the future.

"The opportunity of a lifetime must be seized during the lifetime of the opportunity". ~ Leonard Ravenhill

Want to see what can be done in your unique situation to create possibilites for your future?

 

Ready to Get Started? Click HERE

Your Trusted Advisors & Retirement Specialists,

Willis & Nancy Langford

 

 

 

 

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