TriDelta President Ted Rechtshaffen joins House Money on BNN with advice for parents possibly looking to help their kids buy a home.
The explosive growth of the Canadian housing market in the last decade may finally be coming to an end.
Interestingly there is good logic on both sides of the debate and it is anyone’s guess where markets go in the short term:
The reasons for it to continue growing:
Among reasons for the long boom to end:
The correction may already have begun. Consider that the Teranet-National Bank index of house prices in Canada’s 11 largest metropolitan regions rose 6.1% in November, yet only four cities—Toronto, Hamilton, Vancouver and Victoria actually posted gains. Values in the other seven cities contracted, suggesting that a correction is well underway.
Here are two recent articles that provide more food for thought on our real estate market:
The first article from Maclean’s suggests that population growth isn’t driving Toronto house prices as many have claimed.
The second article from MoneySense magazine, takes a broader approach and provides the Canadian Real Estate Associations (CREA) perspective.
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:
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.
Most people think of mortgages as pretty straight forward products. Our message is don’t be fooled, they are not. Finding the right solution is best done by partnering with an expert such as a mortgage broker.
The last couple of days have delivered the lowest rates ever, which is great news for those of us needing a mortgage, but again be diligent in working with the right partner to find the solution that is best for your particular situation – talk to us and we will guide you.
A relatively new option is a collateral mortgage solution. Most people are not familiar with this type of mortgage, but it has some unique features that may be beneficial.
We asked one of our preferred mortgage brokers, Jacques du Preez of Mortgage Allies to clarify things and provide his advice on collateral mortgages:
What is a Collateral Charge?
It is an alternative way for lenders to place a mortgage against a property. A collateral charge can contain more than one mortgage component such as a classic mortgage and a secured line of credit. Collateral mortgages are also re-advanceable.
What is good about collateral mortgages:
What is bad about collateral mortgages:
Collateral mortgages are not for everyone and they should always be entered into as a result of a strategy.
Here are a few guidelines:
The golden rule: Don’t allow your lender to place a collateral mortgage on your property unless you have a reason to do it.
Ellen Roseman of The Toronto Star also wrote an article highlighting the differences between a conventional and a collateral mortgage.
Read the entire article.