If you’re in the market for a new home this piece applies to you. On Monday, October 3, 2016, the federal government announced four major changes in housing rules for Canadian homebuyers. The changes focus on two areas: mortgage debt and foreign buyers. We’ve put together a brief summary of each change, and what these changes might mean for you.
The Current Rules
In Canada, the federal government backs mortgage insurance provided by the Canada Mortgage and Housing Corp (CMHC).
Currently, the size of a new home buyer's down payment dictates the required insurance policy. Home buyers providing a down payment between 5% and 19% of the purchase price must be backed by mortgage insurance. Known as “high loan-to-value” or “high ratio” mortgages, this insurance protects the lender if the home buyer defaults.
For home buyers providing down payment of 20% or more, “low ratio” insurance is available to covers 100% of the loan in the event of a default.
The changes introduced by the federal government all revolve around mortgage risk and lending practices.
So how do the new rules affect you?
1. Expanding The Mortgage Rate Stress Test
Beginning on October 17, 2016, the "mortgage rate stress test" will be applied to all new insured mortgages.
The mortgage rate stress test is aimed at determining whether or not a home buyer could continue to afford a mortgage if interest rates were to rise. Previously, this test was only required for “high loan-to-value” or “high ratio” mortgages, but as of October 17, it will be applied to all new insured mortgages.
Home buyers will now need to qualify for a loan at the negotiated rate in the mortgage contract as well as the Bank of Canada’s posted five-year fixed mortgage rate. The Bank of Canada’s rate is typically higher than the negotiated rate meaning home buyers must ensure they can meet the higher rate, even if they negotiate a lower one.
The new rules also require a home buyer spend no more than 39% of their income on home costs such as the mortgage, utilities, and taxes, and no more than 44% on all other debt payments; a ratio known as Total Debt Service.
Simply put, the revised mortgage rate stress test is aimed at reducing the risk for both home buyers and lenders. If you’re a new homebuyer, this directly affects you.
2. New Conditions On Low-Ratio Mortgages
Starting November 30, 2016, new restrictions will be applied to the provision of low-ratio mortgages.
Low-ratio mortgages are available to homebuyers who put down 20% or more for a down payment on a new home. There are new conditions being introduced for low-ratio mortgages:
- The purchase price must be less than $1 million
- The property must be owner-occupied
- The buyer must have a credit score of no less than 600
- The amortization period – also known as the repayment schedule – must be 25 years or less
Simply put, these new conditions are aimed at reducing lender exposure to high-value properties as property prices continue to rise. If you’re a new homebuyer, this also directly affects you.
3. Consultations On Risk Sharing Among Lenders
The federal government has announced they’re launching a consultation on risk sharing among mortgage lenders this fall.
Through CMHC, the federal government is currently liable for 100% of an insured mortgage in the event of a default. For this reason, they’re launching consultations on how a redistribution of risk among lenders might be structured to better protect the financial system from instability in the event of a housing crisis.
Canada is unique in the fact the government backs 100% of mortgage insurance in the event of a default. A structural adjustment that shares default risk among lenders would bring the Canadian government in line with other countries.
Simply put, the consultation is intended to find a path forward on how to better balance risk among lenders. If you’re a new homebuyer, stay tuned; this may impact lender policy in future.
4. Reporting Changes For The Primary Residence Capital Gains Exemption
As of your 2016 tax filing, new reporting measures are applicable to your primary residence capital gains exemption.
It’s a small but important change. Previously, any financial gain accrued from the sale of your primary residence was tax-free and did not have to be reported. Financial gain on your primary residence is still tax-free, but the sale of your primary residence must be reported to the Canada Revenue Agency (CRA).
With this new provision, the Canadian government is addressing concerns of foreign home buyers purchasing and selling homes while claiming a primary residence - an exemption to which they're not entitled.
Simply put, if you're a Canadian home buyer there is no reason to worry; just report the sale of your primary residence at tax time. Otherwise, things remain unchanged.
What’s This All About?
The federal government has introduced a number of new measures revolving around risk. Ultimately, these measures are intended to better protect you as a home buyer, the government as lenders, and the Canadian economy from sudden volatility in the housing market. While you may not be directly impacted by the new changes, it’s important to keep on top of the new rules to avoid any confusion in the future.