I know I’m late to the party on this one, but before I made my comment I wanted to make sure that my assumptions would actually play out.
This fall the government increased a stress test for all individuals that were looking at first time homeownership with less than 20% down. *queue the uproar*
How could the government do this to us… how could they prevent us from our right of home ownership….
The stress test ensures that individuals that are contemplating home ownership qualify at the five year average rate (currently 4.64%) instead of the current rate that the bank of Canada sets (2.7%).
For some reason, the average Canadian thought this was inexcusable, but financially I think it makes perfect sense.
We are a delusional generation that is obsessed with home ownership.
Our parents (the boomers) made a killing in the housing market and they drilled into us that the way to be successful was to purchase a home, get married and have babies (not necessarily in that order). The argument for “equity” is becoming so overused it’s frankly tiring to even think about.
Don’t get me wrong, I understand the emotional side of purchasing a home, you can decorate it however you like, pick furniture that works perfectly in that space and own as many puppies as you want.
But the obsession, I really don’t get. Homeownership is not the be all and end all way of building wealth as a millennial. In fact, the housing market in Alberta has seen a sharp decline and the cost in many major cities (hi Toronto and Vancouver) is exorbitant.
Personally, I think the new mortgage rules are fantastic, for the following reasons:
- The ratios the banks use to determine how much “house” you can afford are outdated. The GDSR is based off of your gross income, I don’t know about you but I don’t get to take home my gross income (the government takes its fair shares) and therefore the banks shouldn’t assess affordability by an amount that actually isn’t deposited into your bank account.
- People tend to take on too much house. I’ve seen it so many times, individuals qualifying for $400,000 of house and then going ahead and taking on a $400,000 mortgage. This is the absolute maximum you can take on, and likely it will mean you are stretched far too thin! If rates increase even a little the people that take on the max won’t be able to afford their monthly payment. Scary, but also accurate.
- If you can’t afford the average rate of interest, are you really ready for home ownership? The average rate in the past 5 years is probably a good indication of where rates will be for the next five year period. In addition to that, interest rates are at an all-time low, debt is cheap, which means the only logical progression is for interest rates to go back up (remember the 90’s?). If you’re the person who took out the maximum mortgage and can barely afford your payment, you’re going to be the first person to foreclose on their home if mortgage rates go up! You don’t want to lose all that cash you’ve poured into your house, do you? Remember, if you foreclose, you don’t get ANY of your money back. *Hint, two banks have already increased their interest rates, so I’m not wrong.
Many lenders put up a stink about the heightened rules for individuals, some even took the time to write this horrifyingly outlandish letter.
It isn’t about the lenders.
I’ve said this before, but the role of government isn’t to protect the businesses of Canada, it’s to protect the people. And frankly, most Canadians are fairly bad at making financial decisions. Most Canadians take on too much debt and jump into homeownership before their ready, so the government increasing the restrictions for Canadians to qualify for mortgages is a good thing. Especially, because we are in a housing bubble. Companies that are whining about the mortgage increases are just looking out for their bottom line (TD posted 31 billion dollars in revenue last year and 7.9 in net income, so they are probably doing just fine).
What’s more concerning is companies that are downplaying the number of foreclosures. I recently watched a company state that “only” 1 in 357 mortgage owners default on their homes. Only????!!! If we pretend for a second that all 35 million Canadians own a home, then 100,000 people are defaulting on their homes, that means they do not have enough money to make their monthly payment and the bank takes their home, along with all the “equity they have built into it.” While I know the number isn’t that high, it’s still incredibly concerning that this many people are in over their heads.
While part of this is up to the government I think we also need to shift our thought process to stop purchasing a home the minute we qualify for one. Because homes are tangible Canadians don’t see this type of investment as a risk. But at the end of the day, if things go south at work you can’t sell a piece of your wall to increase the cash in your bank account. A home is one asset and dumping all your money in it can be dangerous. If you had saved 50,000 would you dump it all in Apple stock? Maybe, cause we know that stock has done well historically, but what if it turned out to be Blackberry? Remember a home is one asset in a very specific industry and throwing all your cash into it can be very risky.
The new housing rules are a good thing, they are ensuring that Canadians are better equipped to pay their mortgages, which means that there will be less defaults. At the end of the day, I have to wonder… when there are these over-priced markets in major cities, are we moving in the right direction? Or should we move more towards the European lifestyle. There are so few Europeans that actually own their homes in major cities, and they are some of the happiest people on the plants. So I question if homes ownership really adds to happiness or if we are just kidding ourselves here and being a rich renter is what it’s all about?
On that note, I’m happy to announce that THREE lucky winner will be receiving a copy of The Wealthy Renter! Enter below!