The new challenges when buying a home in Canada.
In many parts of Canada, this spring has brought unprecedented growth in real estate transactions never seen before. It gives a new appreciation for those who currently own homes, along with unprecedented levels of unaffordability for those who hope to one day be homeowners themselves. Working from home became the norm and small spaces and lack of green space made the move to smaller communities outside of the major ones an exodus of choice. Along with the unprecedented growth in the smaller communities has also come the ultimate challenge for infrastructure to support this movement.
Markets throughout Canada have risen to unprecedented levels with it being a seller’s market wherever you looked. Multiple offers and few listings made the spring market insane. By June the markets had started to calm down to more balanced markets but pricing stayed at their new highs.
Nathanael Lauster, a sociology professor at the University of British Columbia who studies issues related to housing, describes it as a “perfect storm” brought on by the combination of low interest rates and the COVID-19 pandemic, allowing would-be homebuyers to save more money than usual.
On June 1st there was a new mortgage “Stress Test” introduced for all homebuyers. Those who were pre-approved for a mortgage prior to this date had 30-60 days to take advantage of their pre-approved status but, as we enter August and September, we may begin to see a shift in home sales. For a better explanation of this new Mortgage Approval process we have gone to John Wright, Mortgage Broker of Dominion Security Centres http://www.johnwright.ca
Changes to the Stress Test and What You Need to Know
As you may have heard, the Bank of Canada recently changed the stress test rules as of June 1, 2021. With these changes, now both insured and uninsured mortgage borrowers will be subject to a stricter stress test when qualifying for their mortgage.
The new qualifying rate on uninsured mortgages – where the down payment is 20% or more – is now the contracted rate plus two percentage points or 5.25%, whichever is higher.
This means that any buyer whose down payment on a home is one-fifth of the purchase price or higher must show they can afford the mortgage payments if the interest rate was two percentage points higher than what the bank is offering, or the new five-year benchmark rate per the Bank of Canada. Overall, the implementation of these tougher stress test rules will reduce buying power by roughly 4-5% for borrowers.
To help illustrate how this change affects you, consider the following scenario with $100,000 gross income:
The previous stress test at 4.79% would give this individual the ability to borrow $469,530 (based on good credit score with max GDS/TDS qualifications at 39/44%). Now, with the current scenario of 5.25% stress test rate, the they can now only borrow $448,880 (based on good credit score with max GDS/TDS at 39/44%). This is a difference of $20,650 which reduces your home options. To ensure you are searching in the right price range and budgeting accordingly, it is important to consider this stress test change.
How Are Real Estate Services Managed Now
Although COVID 19 has affected all Real Estate services throughout Canada, the Federal Government has declared Real Estate Services across Canada to be an Essential Service. However, there were very strict restrictions and conditions for the Trade in Real Estate to be adhered to.
Effective July 2021 across Canada “Open Houses” have resumed with COVID restrictions and policies in place. This includes the number of visitors, masks must be worn and cleaning processes after each visit. Home listings are still being requested to be promoted virtually. Every visitor to the home is still required to wear masks along with their realtor. They can view the homes before putting in an offer however, showings are still not encouraged.
Electronic signatures of listings and offers is now the acceptable norm and adopted by all Provinces and legislation for Real Estate trades. Also Videoconferencing for witnessing the signature is further authorized.
Deposits are now sent to the listing realtor’s office via electronic transfer to avoid the need to exchange a cheque or visit a real estate office.
Canadian Real Estate Services Update
Whether you require the services of an appraiser, a building inspection, or legal services, there have been no updates nationally that would indicate what changes have come into effect since there has been a lightening of COVID restrictions across the country. It is best to check with your local representative to see how they are able to accommodate your real estate transaction in your area.
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