In this hot Toronto real estate market where every penny counts, some buyers could find themselves with less borrowing power because of new mortgage rules set to take effect within two weeks.
As of Oct. 17, more mortgage applications will undergo a "stress test" to evaluate a borrower's ability to make mortgage payments at a higher interest rate.
The requirement was already in place for some types of mortgages. It will now apply to all insured mortgages, including fixed-rate ones with terms of five years or more.
"This is a dramatic change," David Larock, president of Integrated Mortgage Planners, said in an interview with CBC News.
Larock expects it to bring about higher mortgage rates as lenders apply a "much tougher filter to all of their mortgages."
For borrowers, Larock says that will translate into an 18 per cent drop in what they'll be able to afford after Oct. 17.
According to his calculations, someone with an annual income of $80,000 and a $40,000 down payment — an "average first-time buyer" — currently has a maximum purchase price of $520,000. But after Oct. 17, Larock says that would drop to $425,000.
Effect on Toronto condo market
The new mortgage rules are expected to curtail some of the demand on the real estate market.
CIBC chief economist Benjamin Tal says that among the various ways the federal government is attempting to put the market under control, the so-called stress test rule will be the most effective yet.
"This will have a big impact on the market, there's no question about it," Tal said.
'If there is a beneficiary to these policies, it will be the condo market, whether it's on the for-sale side where buyers are forced into lower price points or on the rental side, as well, as fewer first-time buyers are getting into the marketplace.'
- Shaun Hildebrand, real estate market research firm Urban Nation
In Toronto, where the average price of a detached home is now $1.29 million, many properties won't be affected by the stress test.
By law, homes priced at more than $1 million require the standard minimum down payment of 20 per cent, and are therefore uninsured.
But Tal says the one place the rule changes will be felt is the Toronto condo market, where sale prices are below $1 million a property and deals often involve first-time buyers with down payments of less than 20 per cent.
"That's exactly where the target is," Tal said.
Shaun Hildebrand, senior vice-president of real estate market research firm Urban Nation, agrees with Tal.
"If there is a beneficiary to these policies, it will be the condo market, whether it's on the for-sale side where buyers are forced into lower price points or on the rental side, as well, as fewer first-time buyers are getting into the marketplace," Hildebrand said.
Developing a 'rental mentality'
Tal also believes the stress test will push more potential homebuyers to the rental market, which he sees as a positive shift.
'We have to develop a rental mentality.' - Benjamin Tal, CIBC chief economist
"We are in a twilight zone in which the affordability crisis is consistent with a higher propensity to rent, but people are not renting."
Tal says that in Canada, unlike other parts of the world, there's a cultural tendency to value home ownership more than renting and that current low mortgage rates help maintain it.
"We have to develop a rental mentality."
But, he admits, for this to happen, there needs to be more affordable rental housing built, and government policies should push developers and builders to do it.
"If you remove people from the buying mode, you have to provide them with an alternative."