Condo Market: New Mortgage Rules and the Implications on First Time Buyers

By NextHome Staff
February 21, 2018
If you are planning on purchasing property and if you are a first time homebuyer in Canada, a discussion about requirements necessary to financially qualify would be of the utmost significance.What is the Stress Test? The stress test is another way of saying what if the bank of Canada hikes interest rates? Will homeowners be able to keep paying their mortgage payments? Prior to the new rules, insured mortgages were already subjected to such tests, but now they apply to uninsured mortgages as well. Even if one puts down 20 per cent they still have to pass the stress test to qualify. This will ultimately cause buyers to save up more money and possibly wait to buy. This also means that more buyers might opt to rent instead of own until they are ready. Lastly, another option is to look for something less expensive on the market.Renting, Investing, and the Effect on the Market Let’s break down the possibilities. Since there will be a greater pool of quality tenants who will not have any other option but to rent for the next few years due to their inability to get pre-approved in order to save money, investors will capitalize on this by buying up resale properties and renting them out. I have personally seen an influx of tenants looking to rent. I have also seen bidding wars over the last little while on rentals like never before. This is like the butterfly effect; everything shifts around.A More Balanced Market? Maybe The effect of the new rules on first time buyers and qualification will create more supply in certain price categories. However, it will also have unintended consequences for cheaper properties, subsequently creating a higher demand and more competition. Over time, this will lead to lower end price point increase as options become more limited.My top 6 pros and cons of buying a pre construction condo in today’s marketPROS:
  1. Pre construction should continue to be a great option for buyers who want to secure current market price, allowing time to save for a larger down payment.
  2. Buyers can add more money on closing if they are able to save faster. This means that you can pay down as much as you want before closing to make it easier to qualify on closing, not just the 20 per cent commonly required by builder down payment structure.
  3. Building equity over time, while not having to pay a mortgage payment. (This applies to individuals that do not rent and are living at home).
  4. New building, new condo, means no renovations necessary.
  5. Lower utility/condo fees.
  6. Tarion warranty.
CONS:
  1. Not knowing what new mortgage rules will be in effect by the time the closing comes around.
  2. Renting while waiting to move in. This really takes a bite out of the new condo equity increase, if any, as it balances the books by the time you get your keys.
  3. Not seeing the final product. Having to rely on the floor plan and finishes without seeing them.
  4. Less character and size. Newer condos are getting smaller as price per square foot is increased over time.
  5. Waiting.
So What’s Next? My opinion is to first seek a pre-approval from a qualified mortgage broker before deciding what direction to take. Depending on your pre-approval, you can decide if you want to wait to buy preconstruction while saving money, or if you are in a good financial position now. Another question will be if the pre-approval amount meets your needs when it comes to what is currently available (resale) on the market for your approved price range. Obviously, different segments of the market, such as price range, area, type or property will have different implications.Long term, I believe that the real estate market is on the right track over all.ARIE BUZILO is a real estate broker and an investor specializing in buying and selling properties all over the GTA. He works out of Century 21 Leading Edge Realty.

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