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How the new housing rules affect your purchasing power

How much home can you afford?

Possibly less under new rules unveiled Monday by the federal Liberal government.

Starting Oct. 17, all insured new homebuyers must "stress test" their ability to carry their mortgage payments at whichever is greater: the negotiated rate in their mortgage contract or the Bank of Canada's five-year fixed posted rate.

Most recently, the central bank's posted rate was 4.64 per cent – or about two percentage points greater than many discounted rates on offer.

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Mortgage insurance is required when homebuyers make a down payment of less than 20 per cent of the home's purchase price. Some buyers who meet this threshold may also need insurance. The purpose of mortgage insurance is to protect lenders in the event of default.

The expanded "stress tests" will aim to ensure that home buyers could still afford their mortgage payments if interest rates climb higher.

We've asked RateHub.ca, an online personal-finance resource, to calculate what buyers at three income levels could afford under the new and outgoing rules. For each scenario, certain assumptions have been made:

  • Each buyer has saved $40,000 for the down payment

  • Under the outgoing rules, calculations are based on a five-year fixed mortgage rate of 2.17 per cent amortized over 25 years

  • Under the new rules, calculations are based on a five-year fixed mortgage rate of 4.64 per cent (the Bank of Canada’s posted rate) amortized over 25 years

  • Monthly property taxes of $400 and monthly heating costs of $200

Scenario No. 1

Annual household income (pretax): $50,000
The maximum purchase price this buyer can qualify for:

  • Outgoing rules: $277,434
  • New rules: $222,617

Scenario No. 2

Annual household income (pretax): $100,000
The maximum purchase price this buyer can qualify for:

  • Outgoing rules: $650,000
  • New rules: $512,133

Under the soon-to-expire rules, this buyer's maximum purchase price is dictated by the minimum down payment that's required.

Federal rules stipulate that home buyers must put down at least five per cent on the first $500,000 of the home's purchase price and 10 per cent on the remaining balance. (Homes priced at $1-million and up require a 20-per-cent down payment.)

Thus, with $40,000 saved up, under the current rules, this buyer can put down the minimum on a $650,000 home, and earns enough to afford the subsequent mortgage payments and other housing costs.

But when asked to qualify at a steeper mortgage rate, this buyer's spending power is diminished by nearly $140,000.

Scenario No. 3

Annual household income (pretax): $150,000
The maximum purchase price this buyer can qualify for:

  • Outgoing rules: $650,000
  • New rules: $650,000

In this scenario, the buyer is not affected by the new rules. What the buyer can afford is limited by down-payment rules, rather than the debt-to-service ratio.

Instead, let's assume the buyer has $80,000 for the down payment.

The maximum purchase price this buyer can qualify for:

  • Outgoing rules: $999,999
  • New rules: $841,649

Notes: These calculations do not take monthly condo fees into account, which would reduce affordability. Nor do they account for other debt obligations that home buyers may have.

Editor's note: Calculations are based on a gross debt service (GDS) ratio limit of 39 per cent, which is the maximum allowed by the federal government. The GDS ratio is the percentage of pretax monthly household income needed to pay monthly housing costs, which include principal, interest, taxes, heating and half of condo fees.

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