New Mortgage Rules And What It Means For You
(written November of 2016)
Effective October 17, 2016 (announced on October 3, 2016), mortgage rules changed for you and every other Canadian. In an effort to get control of Canadians borrowing, and to help cool over-heated markets like Vancouver and Toronto, the Canadian Government implemented some new borrowing rules for Canadians who are purchasing homes.
So what was changed?
They have implemented what is called an interest rate “stress-test.” How it works, is:
“To help ensure new homeowners can afford their mortgages even when interest rates begin to rise, mortgage insurance rules require in some cases that lenders “stress test” a borrower’s ability to make their mortgage payments at a higher interest rate. Currently, this requirement only applies to a subset of insured mortgages with variable interest rates or fixed interest rates with terms less than five years. Effective October 17, 2016, this requirement will apply to all insured mortgages, including fixed-rate mortgages with terms of five years and more. Homeowners with an existing insured mortgage or those renewing existing insured mortgages are not affected by this measure.” Source – Department of Finance Canada Website
What this means to you: They want you to be able to qualify at the posted rate before the banks discounts. For example, if the posted rate is 3.89% on a 4-year fixed rate, this is what you need to qualify for even though you are still getting the banks “special rate” of 2.39%. So, a family with a modest to no debt situation and a household income of $80,000 per year who were qualified for a mortgage of $505,000 with a 5% down payment, now, after the new changes, qualify for a $405,000 mortgage.
Who this affects most?
IMHO, this is mostly going to hurt millennial and first time buyers who planned to get in the housing market this year. Now, they will likely have to rent for a couple more years to pay off debt and make a higher income before they are able to qualify for the home they want/need.
To put it in further perspective:
A first time buyer is looking to purchase a home. If they are looking at an entry level home priced at $384,500 (based on 5% down payment, no household debt, with a household income of $70,000), after new qualification changes, their same household income scenario now qualifies for $304,875. This has now taken them out of a possible single family home, and potentially pushed them into a half duplex style home, but more likely a condominium of some sort. Depending on your current needs, these changes may take you out of the buying market and keep you renting for another year or two while you build your income to qualify for the home you want.
Additionally, non-bank lenders such as, First National and Merix will have to follow high-ratio rules even if the consumer has a 20% or more in down payments. What this means is, no more 30-year amortizations, mortgages on properties over 1 million dollars, or mortgages on rental properties. As it stands though, there is no indication of any changes for conventional mortgages through chartered banks or credit unions.
Proposed Income Tax Measures
The Government Of Canada offers tax benefits to homeowners selling their principal residence via the “the principal residence exemption,” which exempts you from any capital gains taxation. Now, before you start feeling freaked out, you still qualify for this; however, CRA now wants more information provided to show it is in fact your primary family household. They want proof you were a Canadian resident the year your home was acquired, etc,. These changes were made to stop foreign buyers from playing the stock market with Canadian real estate in markets like Vancouver.
These are a few of the major changes recently implemented and I hope it gave you some insight as to how it may affect you and your home purchase. For more information on these changes please contact your lending professional, or visit the sites below.
The Department Of Finance Canada:
CRA (Canadian Revenue Agency) Website:
http://www.cra-arc.gc.ca/gncy/bdgt/2016/tc02-eng.html
~ Corey Sylvester, REALTOR®
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