A new year brings plenty of resolutions, and this year will also bring plenty of change when it comes to mortgages. These changes will affect the market in several ways, according to a 2016 Digital Money Trends Report. Here are some trends that may be here to stay in the year ahead.
You’re going to need a bigger down payment.
Although the down payment requirements haven’t changed, having more money upfront has a bigger impact on home purchasing, especially for first-time buyers. “As mortgage policy in Canada continues to evolve, the benefits of having a 20 per cent down payment on a home continue to grow,” the report reads. “In addition to saving on mortgage default insurance, having a 20 per cent down payment is now the only way for first-time homebuyers to qualify for a mortgage at the contract rate. The increased importance of reaching this savings milestone may lead to an even higher percentage of first-time homebuyers sourcing some (or all) of their down payment from family.”
Asking for help will be the norm
In order to reach that coveted 20 per cent down payment, most first-time homeowners are going to need help. Although monetary gifts from parents to their children has certainly been a common practice over the years, it’s no longer a bonus; increasingly, it’s the case that young adults can’t break into some housing markets without that help. Fourty-four per cent of millennial first-time homebuyers receive financial help from family on their down payment, according to the report.
Five-year fixed falling out of favour
The five-year fixed mortgage is a popular product, and for good reason. It promises a period of stability during which your mortgage payments will not change. A 2015 survey by Canadian Association of Accredited Mortgage Professionals (now Mortgage Professionals Canada) shows that for all homes purchased between 2013 and 2015, 72 per cent of first-time buyers had fixed rate mortgages, and 67 per cent of those where for a five-year term. The product has become even more attractive recently, as that the gap in interest rates offered between variable rate mortgages and fixed rate mortgages narrowed greatly in 2016, reducing the need for buyers to opt for a variable rate mortgage because of a much better interest rate. One of new mortgage rules that came down in October, however, was that five-year fixed rate mortgages now have to be qualified at the Bank of Canada rate as opposed to the proposed contract rate. This is a big deal, as the Bank of Canada rate is more than two per cent higher. “Prior to October 2016, the five-year fixed rate mortgage had a key advantage in that it was easier to qualify for,” the report reads. “New rules now require Canadians with a down payment of less than 20 per cent to qualify for all mortgage types and terms using the Bank of Canada’s qualifying rate. The loss of this incentive could lead to a more even distribution in the popularity of rate types and terms in the near future, especially among first-time homebuyers.” In other words, more people who may not be able to qualify for the five-year fixed rate mortgage will be more inclined to look into other options, whether they’re variable rate mortgages or shorter fixed-rate mortgages.
Revitalized use for mortgage brokers
Tougher rules mean that it’s getting more difficult for consumers to wade through information on their own and truly get the best mortgage for their particular circumstance. “There’s a lot of confusion right now, there’s a lot of misunderstanding about mortgage rules, qualification standards, and what it means to the average family,” said Gary Mauris, president of Dominion Lending Centres. “I think in many ways, there’s never been a time when Canadian consumers really need the clarity that mortgage professionals can bring to them.” Although the majority of home buyers still head to banks for their mortgages, mortgage brokers have been growing their share of the mortgage market, and more people may turn to mortgage brokers in order to help them decipher the new qualification requirements and find the best lender.