There were some important rule changes put in place for mortgage lenders on October 17, 2016. For many buyers, the end result of the new mortgage rules will be less buying power. For sellers, it could mean lower selling prices.
Depending on what you read and who you talk to, there might be some confusion on what exactly the changes are and who they will affect. Here is what you need to know:
Why is This Happening?
The new mortgage rules are being introduced to protect Canadians from taking on bigger mortgages than they can afford in an era of historically low interest rates. The government is also taking steps to address the growing concerns around foreign buyers who buy and flip homes in Canada.
1. Buyers with a down payment of less than 20% will be required to qualify for a mortgage using the (higher) posted rate instead of the (lower) discounted rate.
While high-ratio borrowers will still be able to negotiate and take advantage of lower interest rates, the amount they qualify for will now be based on the posted rate (currently 4.64%), not the discounted rate, which has recently been as low as 2.4%.
The change could mean as much as 20% less buying power on your purchase price.
We asked our mortgage man Steve Harrison at Mortgages.ca to help us understand what the changes look like. Here is a real life example that he shared with us:
Before October 17th: A buyer with a 15% down payment has been approved up to a $750,000 purchase.
After October 17th: The same buyer, under the new stress test, will only be approved for a $620,000 purchase.
2. On November 30th, buyers with a down payment of 20% or more will also need to qualify at the higher interest rate under the new mortgage rules.
Historically, the rules for low-ratio mortgages (down payment of 20% or more) have been more lenient because there is more equity (cash) paid into your home. After November 30th, the rules used to underwrite low-ratio insured mortgages will be the same as high-ratio mortgages.
All high-ratio mortgages (less than a 20% down payment) require CMHC insurance. What many people don’t know is that while low-ratio mortgages do not require CMHC insurance, many lenders will pay for the default coverage themselves because the benefits of the reduced securitization costs and lower capital requirements that come with this protection are worth more to them than the cost of the coverage. Insured, low-ratio loans account for approximately 1/3 of all residential insured mortgages.
3. When you sell your home, you will be required to declare it on your income taxes.
In most cases, when you buy any investment (i.e. stocks) you are required to pay tax on any capital gains (profit) incurred when you sell. When it comes to selling your primary residence (i.e. the house you live in), the government offers a “principle residence tax exemption” to Canadian residents, meaning you don’t pay tax on any capital gains or profit made between what you paid for the house and what it sold for.
Recently, there has been a spike in the number of non-resident buyers who have been purchasing property and claiming it as their primary home in Canada to avoid pay tax. The new rules will prevent anyone who is not a permanent resident in Canada from claiming the exemption and will be required to pay the capital gains tax.
New Mortgage Rules: What Does All This Mean To You?
Overall, this is a good thing — and we don’t see the value of homes dropping. While we do anticipate a cooling effect to occur, slowing the 14-20% year-over-year market growth we’ve seen this year, our prediction is that the market will continue to increase at a healthy rate as it has done for the past 7 years. If you’re planning to “wait it out”, we’re of the opinion that waiting will only result in paying more for the same property today.
In our opinion, one of the next logical changes (maybe sometime next year?) is to see mortgage rates start to increase. With this first step in place to protect buyers from over extending themselves, an increase in interest rates will mean higher monthly house costs, but buyers won’t feel the pinch as rates rise because they didn’t max out under these new rules.
Our advice is to continue as planned and buy when you’re ready. If you’re working with an experienced Realtor, their market knowledge and bidding strategies should account for all of these factors. Have them crunch the numbers with you when it’s time to offer on the right place to ensure you’re comfortable.
Have any thoughts? Questions? Feel free to drop us a line.
You can read up on all the details on the Department of Finance website.