News Flash: Changes to Canada’s Housing Rules Announced. Will this affect your upcoming mortgage renewal or your next home purchase?
On Monday, October 3rd, Finance Minister Bill Morneau announced four major changes to Canada’s housing rules. If you are buying or selling this fall or upcoming winter or have a mortgage up for renewal, this could affect you.
- Stress Test Will be Required For ALL Insured Mortgages: As of October 17, 2016, “a stress test for approving high-ratio mortgages will be applied to all new insured mortgages – including those where the buyer has more than 20% for a down payment,” writes Bill Curry, Globe and Mail. Current rules define a high ratio mortgage as one where the buyer has between 5-20% down payment of the purchase price and must be backed by a mortgage provider. Up to now, stress tests were NOT required for fixed-rate mortgages longer than five years. They will be now.
Goal of the stress test? To assure the lender of the mortgage, that the home buyer could still afford the mortgage should mortgage rates increase by 1 or 2%.
What does this mean? Prior to this change, a home buyer could get a mortgage if their debt-ratio showed that they could afford to make payments on a discounted Bank of Canada mortgage qualifying rate of about 2-2.99%. Now, a home buyer will have to qualify ON the Bank of Canada mortgage qualifying rate which was around 4.6% in 2015.
How does this look? Romana King from MoneySense .ca had a great example to illustrate this, using RateHub.ca mortgage affordability calculator. She says that a family with an annual income of $100,000, with a down payment of $40,000 and using a five-year fixed mortgage rate of 2.17% will qualify to purchase a home worth $665,435, under the current rules. (Assumes property tax of $400 and monthly heating costs of $150.)
Under the new rules, this same family would have to qualify for a mortgage using the posted rate of 4.64%. This would drop their home purchase price to $505,762—a difference of $159,673, or a 24% reduction in the home purchase price. There is enough of a difference to take some buyers out of their desired neighborhoods and in many cases, out of the opportunity to buy a semi-detached or detached property.
Will this keep more first-time home buyers out of the semi-detached and detached home market? We think so. We are also predicting it will increase the number of townhouse and condo buyers in the market in the GTA.
- Effective November 30, 2016, the guidelines will change for government provided insurance for low-ratio mortgages.
New criteria will include:
- 25 year or less amortization,
- Purchase price of less than $1 million,
- Buyer credit score of at least 600, and
- Property to be owner-occupied.
What does this affect? This lowers the governments’ exposure to properties worth $1 million+.
Why this change? This comes out of a concern that rising housing costs in Toronto and Vancouver have made those cities increasingly unaffordable for many Canadians, especially for middle-class families. The goal is to help the markets function more efficiently and provide more stability.
- Closing A Tax Hole Loop: Change in reporting rules for primary residence capital gains exemption. Prior to this, any profit from selling a primary residence has been tax-free and has not been reported as income. As of this tax year (2016), the capital gains tax will still be waived, but the primary residence must be reported at tax time to the Canada Revenue Agency. Only one primary residence may be designated.
Why is this occurring? This is to prevent foreign investors, primarily in Toronto and Vancouver, from buying and selling homes in Canada and claiming a primary tax residence exemption for a property that is NOT their primary residence. We believe this is a good thing.
- Current mortgage practices dictate that the federal government is responsible to cover 100% of the default of a mortgage. The new change? To have mortgage lenders, such as banks, take this on as added risk so it’s not just the federal government. We feel this could lead to potentially higher mortgage rates or fees for home buyers, as lenders pass those risk costs on to you, the consumer.
Overall? The sold prices of houses seem to just keep running higher and higher. We see that the prices have continued to climb steadily in the GTA, especially as the purchase demand has increased and inventory of homes for sale has decreased. Will these new regulations help to stabilize the market and decrease the year-over-year double digit increases? We are just not sure. The next 6-12 months will be telling, that we are sure of.
What are your thoughts? Do you think these changes will impact you directly?
For your Toronto, Toronto West, Etobicoke, Mimico, and downtown Toronto real estate needs, we are happy to be your subject matter expert. Contact Rayissa at 416-400-0805 or firstname.lastname@example.org or Sandy at 416-697-7093.