On October 3rd , the federal government announced new mortgage requirements, which are designed to dampen the housing price euphoria.
Getting a mortgage approved at a great rate or maximizing the value of your real estate could both be impacted by these changes. At TriDelta, we are able to help you or your children with getting the best mortgage, and also help those with their planning around whether to buy, hold or sell real estate. Feel free to ask us for help in either of these areas.
These new requirements follow four rounds of changes made previously to tighten eligibility rules. For new insurable loans between 2008 and 2012, the changes included:
- the minimum down payment was increased to five per cent from zero
- the maximum amortization period was reduced in stages to 25 years from 40 years and the maximum insurable house price was limited to below $1 million.
- Buyers with a down payment of at least 5% of the purchase price, but less than 20% must be backed by mortgage insurance. This protects the lender in the event that the home buyer defaults. These loans are known as “high loan-to-value” or “high ratio” mortgages.
New rules include:
Applying a Mortgage Rate Stress Test to All Insured Mortgages.
Effective October 17, 2016, a stress test used for approving high-ratio mortgages will be applied to all new insured mortgages. This includes those where the buyer has more than 20 per cent for a down payment. This new stress test is designed to build in some wiggle room so new buyers can manage an interest rate rise. The home buyer would need to qualify for a loan at both their contract mortgage rate (currently +-2.5%) and the Bank of Canada’s conventional five-year fixed posted rate, which is currently 4.64%.
The stress test also requires that the home buyer spends no more than 39% (previously 32%) of income on home-carrying costs like mortgage payments, heat and taxes. The buyers also have to ensure their Total Debt Service (TDS) ratio, which includes all other debt payments does not exceed 44% (previously 40%). This shows the government easing up on previous limits as they allow home owners to allocate more of their income for housing and debt payments.
This new provision ensuring home owners have an ability-to-repay will put pressure on self-employed borrowers who will have to make sure they can document at least two years’ worth of sufficient income to get a mortgage.
Down payment requirements have also been boosted:
Under the changes Canadians can still put down five per cent on the first $500,000 of a home purchase, at least 10 per cent down on the portion of a home that costs more than $500,000 and for homes that cost more than $1 million will still require a 20 per cent down payment.
For those purchasing with less than 20% down, the affordability table below illustrates the impact of the new mortgage rules, indicating the maximum house price before and after the October 17th changes.
Changes to Low-Ratio Mortgage Insurance Eligibility Requirements – Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low loan-to-value mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages.
Impact of Changes: Based on year-to-date 2016 data, it is estimated that a little over one third of insured mortgages, mainly for first time home buyers, would have difficulty meeting the required debt service ratios and home buyers would need to consider buying a lower priced property or increase the size of their down payment. Additionally, approximately 50% to 55% of new insurance requests, would no longer be eligible for mortgage insurance under the new Low Ratio mortgage insurance requirements.
This will affect all home buyers who are seeking a mortgage that may stretch them too thin if interest rates were to rise.The government is responding to concerns that sharp rises in house prices in cities like Toronto and Vancouver could increase the risk of defaults in the future should mortgage rates rise.
An additional change that may come as a surprise to many, is the new reporting rule for the primary residence capital gains exemption. As you know, any financial gain from selling your primary residence is tax-free and does not have to be reported as income. As of this tax year, the capital gains tax is still waived, however the sale of the primary residence must be reported at tax time to the Canada Revenue Agency. Everyone who sells their primary residence will have a new obligation to report the sale to the CRA. The change is aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax exemption for which they are not entitled. However this will catch many off guard.
These new rules will definitely have an impact on new and upgrading homebuyers, but also come into effect at a time when many who are thinking of retiring, may not be able to sell their homes as quickly or for as much as they originally hoped to fund their retirement plans.
To review how these changes may impact your home purchase or retirement plans, please contact us for a no obligation review of your situation.