Pre-Approvals After April 19

Mortgage-Preapproval-Qualifying-Rate Here’s a question:

Suppose you get pre-approved before April 19 and you’re putting down less than 20%.  What happens if you don’t sign a purchase agreement until, on or after, April 19? Which qualifying rate will the lender use to determine if you can afford the mortgage?

We spoke with CMHC and they were helpful in providing this clarification:

Pre-approval does not count as a financing agreement as it doesn’t represent a binding agreement to advance funds.  So even if the borrower gets pre-approved before April 19, given that he/she would sign the purchase agreement after the cut-off date, the new rules would apply.

In practice, if you’re well-qualified, you won’t be impacted by any of this.

If, however, you are getting pre-approved and your debt ratios are near the limits, it could mean that:

a)  The higher qualifying rate after April 19 might reduce the mortgage amount you’ll qualify for (assuming you haven’t signed a purchase agreement before then); and,

b)  You might potentially qualify for only a 5-year fixed term. (see: The 5-year Funnel)

Keep in mind that the government’s new posted qualifying rate does not apply if you are putting down 20% or more.  The one exception is, if you use a lender that chooses to apply the new rules regardless of your loan-to-value.

As always, the best bet is to speak to a mortgage planner for details specific to your situation.

  1. One might wonder why the government is tightening the screws on mortgage eligibility generally, and on revenue properties and self employed individuals at this time.
    If the economists can be trusted, the net effect of the changes in the rules will be relatively modest in terms of housing demand, and will not likely mitigate the rapid runup of demand that the Canadian real estate market has experienced in the last few months.
    What these change do, however, is significantly impact entreprenuers and business people, in a major way for some, like rental property owners and managers, and in a lesser way, for self employed business people in all catagories.
    It makes it substantially harder for these people to acquire real estate assets in the first place, or to leverage their existing properties for capital for business purposes.(such as for purchasing revenue or commercial property)
    It seems somewhat counterintuitative to reduce demand for commercial property or revenue properties by knocking the stuffing out of the ability of borrowers to get money, but it may make a certain amount of sense given that the commercial real estate markets are pretty fragile, with real downward pressure on demand and pricing.
    So far, the government’s reasons make little sense to me except for the political gain they may make by being seen to be doing “something”. Unfortunately, the “something” they are doing is simple plain wrong.

  2. The recent changes will have a negative impact on housing demand, but there are too many variables at play to estimate their magnitude. Economists have made their estimates because that is their job.
    The govt are attempting to remove what they perceive to be the riskiest components of demand from the system, while still maintaining the ability of the average Canadian to buy home and be able to stay in it. That way, they will inject some stability into the system, and protect homeowners from price shocks that will occur if the market continues at the pace it is on.
    Sure there may be some declines in real estate values going forward- that’s happened before, and if people are happy where they live, and can afford their mortgages, they will be okay and it will pass.
    Some people will may have to sell, some of them may lose money (god forbid) and that will be part of the process called life.
    Real Estate generates a long term return of 5%. Markets always revert to the mean.
    So yes, people trying to built up investment property portfolios will be affected, so what: they just enjoyed the opportunity of a lifetime to acquire rentals the past three years. Hopefully they will be skilled at property management!
    Self Employed people who use legal methods to declare no income will be impacted, so what: if they don’t pay any taxes, they should have 20% down to buy a freakin’ house!
    These opportunities in mortgages will come back, repackaged and rethought, sometime in the future, by CMHC or Genworth or AIG (definitely repackaged) or somebody more clever. But that can only happen once the economy rebounds in a legitimate way and not one heavily stimulated by mortgage credit.

  3. “Self Employed people who use legal methods to declare no income will be impacted, so what: if they don’t pay any taxes, they should have 20% down to buy a freakin’ house!”
    Who said the self-employed don’t pay any taxes?
    That’s a very uninformed comment.

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