The unprecedented times of COVID-19 have brought about uncertainty and unpredictability in most industries worldwide, with the Canadian real estate sector being no exception.

While first-time house hunters were anticipating a silver lining in COVID-19’s economic rampage, a shot at the real estate market, experts have advised that first-time buyers should first educate themselves on the new stricter mortgage regulations and the impact of being new homeowners in an economic downturn before making the big purchase.

Before COVID-19 was declared a pandemic by the World Health Organization on March 11, the market was set to soar at the start of the year. According to the Canadian Real Estate Association, February 2020 saw year-over-year sales increase by 27% nationwide, suggesting a similar trend throughout the year. Major cities such as Toronto’s and Vancouver’s sales escalated by 45.6% and 44.9% year-over-year, respectively.

And then COVID-19 hit!

Within one month, the entire industry plummeted, citing a 57% decrease in national average sales in May. On a year-over-year basis, home prices have stalled, with the average price rising only about $1,000 in April, which was down approximately $90,000 from February’s average price of $910,319, according to reports from the Association.

While it’s not all doom and gloom, since August saw an imminent “quicker-than-expected recovery in sales,” as reported by RBC’s latest monthly housing market update. And according to the most recent housing market survey done in September by Mortgage Professional Canada, data shows a continued recovery in the economy. 

Although interest rates are at an all-time low, and the buyer has more substantial negotiation power, the rigmarole of these extraordinary times has manifested some fundamental changes, especially for first-time buyers to take note of. It is imperative to take this time to understand the changes in the market somewhat comprehensively to be safe than sorry.

Before considering the changes, there are top five cardinal rules for first-time buyers before purchasing a house or condo, according to the Ratehub website:

1. Save for a down payment and Other Expenses - In Canada, people typically spend between 5% and 20% of the purchase price on a down payment. For anything less than a 20% down payment, it is mandatory to pay Canada Mortgage, and Housing Corporation (CMHC)’s mortgage default insurance, which is calculated based on the size of the mortgage and down payment.
2. Save for closing costs - Put aside some money (generally 1.5 to 4% of the home purchase price) to cover future closing costs, including land transfer tax, legal fees, title insurance, etc.
3. Make sure you can afford the home you want - Get your finances in order before cruising the real estate listings. This process will help you estimate how much you can afford to buy and organize critical documents required to support a mortgage application. Also, check your credit score to ensure it is in good standing.
4. Get a Pre-approval! - A pre-approval is not mandatory, but it is strongly advised. A pre-approval determines the home price you can afford, which essentially sets your budget for house-hunting.
5. Shop around! - Since interest rates are continually fluctuating, it’s essential to shop around and find the most competitive mortgage rates.

In June, Canada Mortgage and Housing Corporation (CMHC) announced that it would establish much stricter mortgage qualifications for high-risk borrowers or those who offer down payments of less than 20%.

So what are these new changes? We spoke to mortgage specialist Aaron Wong, who shed some light on the significant development during the economic shutdown. 

“In a nutshell, a higher income and credit score is required in addition to down payment being from your source and cannot be borrowed. 

“However, it's worth noting that this only impacts high-risk borrowers applicants and those who are putting less than 20% down-payment and that CMHC is not the only mortgage default insurance provider, and the other private insurers have not followed as of now,” said Wong.

According to CMHC’s website, the new regulations, which came into effect as of July 1, will include:

• A minimum credit score of 680 for at least one borrower compared the previous credit score of 600.
• Eliminate borrowed down payments.
• Limiting Gross Debt Service (GDS) ratios to 35% (from 39%).
• Limiting Total Debt Service (TDS) ratios to 42% (from 44%).

Wong added that CMHC’s new debt-ratio policy would cut homebuyers’ purchase power by up to 11%. For example, a first-time buyer earning $60,000 with no other debt and 5% down could afford approximately 10.9% less home under CMHC’s new rules. That’s like jacking up the minimum stress test rate from 4.94% previously to 6.30%.

“Always consult your mortgage professional to learn about your eligibility, affordability, options, income and down-payment requirements before placing a purchase offer.

“Unless you are prepared to pay off the property in full, always get a mortgage pre-approval before placing a purchase offer,” he added.

Despite stricter mortgage regulations, first-time buyers can also take advantage of several incentives, including:

• The First-Time Home Buyer Incentive by the government offers eligible buyers up to 10% of a home’s purchase price to put toward their down payment, thus lowering mortgage cost on a shared-equity mortgage with the government. As a result, the government shares in both the upside and downside of the property value.
• Depending on the location, a no land transfer tax will apply to qualifying first-time purchasers on the first $368,000 of the value of their home. First-time purchasers of homes greater than $368,000 would receive a maximum refund of $4,000.
• The RRSP Home-Buyers Plan allows first-time homebuyers to withdraw up to $25,000 from their RRSP (or $50,000 for a couple) to finance a down payment. The RRSPs must be at least 90 days old, and you must sign an agreement to build or buy a home; but as long as you repay within 15 years, the withdrawal is tax-free.
• The First-Time Home Buyer Tax Credit offers a $5,000 non-refundable income tax credit amount on a qualifying home acquired after January 27, 2009. For an eligible individual, the credit will provide up to $750 in federal tax relief.
• GST/HST New Housing Rebate reimburses eligible homeowners for part of the GST/HST paid on the purchase price or cost of building a new house, on the value of substantially renovating or building a significant addition onto an existing home, or on converting a non-residential property into a house.

If you are thinking of making a move and have questions or concerns reach out and I would be happy to assist you in any way.