Anyone in the market for a new home will no doubt have seen some of the extensive media coverage of the recently announced changes to mortgage requirements in Canada.
With sustained low interest rates pushing up house prices at an unprecedented pace (Markham home prices jumped 16.8% in September versus September, 2015) the Canadian government wants to guard against home buyers taking on larger mortgages than they can afford.
Some changes are aimed at one segment of home sellers. The new rules puts the brakes on house flipping by foreign buyers who are taking advantage of the massive house price jumps every month.
But, with rules already complicated by earlier changes, it can be difficult for home buyers to know how the new housing rules affect them and their ability to buy the home of their choice.
The Current Rules
Currently, if a buyer has between a 5% and 20% down payment, they must get mortgage insurance for the entire mortgage. These mortgages are known as “high ratio”. With more than a 20% down payment, the lender or borrower could get “low ratio” mortgage insurance.
All mortgage insurance in Canada is backed by the Federal Government through the Canada Mortgage & Housing Corp. (CMHC), which also sells the insurance along with two private insurance companies. The Federal Government backs the insurance offered by the private companies, subject to a 10% deductible.
The New Rules
1. New Qualification Rules
One of the government’s main concerns is that, if mortgage rates were to increase, many homeowners would not be able to afford the new, higher mortgage payments.
As of Oct. 17, home buyers with high-ratio mortgages and some with low-ratio mortgages will not only have to qualify for their mortgage at the rate in the mortgage contract, but they will also have to qualify for the Bank of Canada’s (BoC) five-year fixed mortgage rate. On September 28th, the BoC five-year rate of 4.64% was more than double some of the rates that buyers could find in the Toronto mortgage market (2.17%).
The new rate qualification guidelines also prevent anyone from spending more than 39% of their income on home-carrying costs, including their mortgage payments, utilities and taxes, or more than 44% of their income on their total debt burden (house carrying costs and other debt, like car loans)
2. Qualification Rules Aimed Only at Low-Ratio Mortgages
Insurance for these types of mortgages will be restricted to those whose amortization is 25 years or less, and the purchase price of the home is less than $1 million.
3. New Tax Reporting Rules for Proceeds of the Sale of a Primary Residence
Currently, homeowners pay no taxes on any financial gain from the sale of their primary residence. They don’t even have to report the sale on tax returns. But the new rules mean that, while the capital gains from the sale are still tax-free, the sale of the home must be reported to the Canada Revenue Agency (CRA).
Even though the official reasoning behind the new requirement is that the government needs more data on home sales, it is widely felt that they are also looking for ways to prevent foreign buyers from flipping houses and constantly avoiding taxes by claiming that the homes are their primary residence.
4. Government Launching Consultation on Transferring More Mortgage Insurance Risk to Lenders
While this one doesn’t affect homeowners’ or buyers’ abilities to qualify for mortgages or avoid capital gains taxes, it could have the biggest effect on interest rates in the future.
Currently, the government covers 100% of the cost of insured mortgages in default, (which the government says is ‘unique’ in the world). It says it will soon release a public consultation paper that outlines their proposal for lenders (like Canada’s banks and mortgage companies) to take on some of that risk.
That means that offering mortgages will be more expensive for banks and mortgage companies and there is the potential for that extra cost to be recouped through higher mortgage rates.
If you have any questions about how the new mortgage rules affect you, as a home buyer or seller, please don’t hesitate to call The Stephen Tar team. We’ll be happy to answer all your questions.