So, after attending a mortgage conference in southern California late last week I was just about to go into "airplane mode" on my mobile and zone out for a few hours on the way home, when I see that Global, The Star, The Globe & Mail and the National Post all had BREAKING NEWS from the Federal Finance Minister who'd just announced a series of new mortgage rules that would impact many home buyers in Canada.
The flight home gave me time to digest the information (thank you inflight wifi) and piece together what was about to happen next for our market. Several hours later, when I landed in Toronto for my last flight home, I sat at the airport and started to write down my thoughts and the effects this new legislation would have on our current real estate market. Most of us know that in Newfoundland (and particularly on the North East Avalon) have had had some challenging times in our real estate market over the past 24 months due to the drastic decrease to the value of our oil and the wealth and strong employment numbers that it creates.
Well, less than 24 hours after I'd published the post I'd made appearances on NTV news, CBC News and even got asked to discuss the fallout from these rule changes on CBC Radio's "The Morning Show" the following morning. It was a whirlwind, and my phone / inbox was blowing up asking for meetings to discuss how this was going to affect them.
At first thought, it was easy to see how this new legislation would push single family home ownership out of reach for many buyers, so I began to run some numbers to see how this would affect the median buyer in our market and turns out it might not put as many people out of the market as originally thought. However, it will mean those currently in the market (and on the cusp of qualifying) will have to make some compromises. Now, I don't mean cutting $80,000 off their purchase price (which is the first thing that comes to mind). I mean, those currently seeking single family properties will have seriously consider refocusing their efforts to 2 apartment style housing. I also believe that in the coming months, as people begin to settle into this new reality, it will significantly drive up demand for 2 apartment homes.
How does this affect me?
Current regulations (pre Oct 17,2016):
Prior to rule change a fairly common situation:
Combined income of $85,000 with approximately $1000 per month in obligations like vehicle loans/leases, credit card, student debt, etc.
Max qualification for a single family home using the old formula (using their ACTUAL fixed rate mortgage of 2.39% as their qualifying rate) would have been $385,000.
After the new rule change comes into effect on Oct 17th, 2016:
Combined income of $85,000 with approximately $1000 per month in obligations such as vehicle loans/leases, credit card, student debt, etc.
Max qualification using the new "Stress Tested" qualifying rate of 4.64% is still $385,000, however, that is for a 2 apt unit with a tenant paying approximately $850 per month in rent.
So, while most blog posts I've read or comments I've seen online are solely focused on how many thousands of dollars this regulation change is going to remove from borrowers buying power, I've crunched the numbers to show the real costs on monthly cash flow, which in this example means the government wants you to have an additional $850 at the end of the each month to be able to afford this property. Unless you're able to remove that equal amount of monthly obligation or ask the boss for a raise, this will be the path of least resistance in your quest for home ownership.
Blessing in disguise?
All things considered, when you consider a 2 apt home, it can be a great wealth builder if you are disciplined enough to use the rental monies to make lump sum payments on your mortgage every year, or in my opinion an even better idea is feed it into a TFSA (or similar investment). This way you can have some savings in the event of a vacancy / loss of income, or even maintenance issues that will undoubtedly come up over the years.
Buying a 2 apartment home can also be a lifestyle enhancer in that you're sharing approximately 25% (on average) of your home, but you end up receiving (in many cases) almost 50% of your mortgage payments covered by your tenants.
The example above is a fairly typical situation, but if you'd like us to run your specific numbers in this same scenario, drop me a note at email@example.com or send a text/call 743-3939 to see how we can make sure your dream can still come true!