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New mortgage rules for Canadians


On October 3, 2016, Federal Finance Minister Bill Morneau announced new measures that should curb the high debt levels that many Canadians seem to take on in their quest for home ownership.  There are four major changes to mortgage qualifying standards for insured mortgages, which started taking effect on October 17, 2016. 

1. Mortgage Qualification Rate

Before October 17th, mortgage financing applicants looking for high ratio mortgages at a 5 year fixed rate only needed to qualify at the current interest rate being offered by their lender. As of October 17th, all high ratio insured mortgage applicants (including those seeking pre-approvals) will need to qualify at the Bank of Canada’s 5 year fixed posted rate. This rate is usually higher than the rate being offered by Canadian lending institutions. With today’s historically low interest rates, some new home owners could find themselves short for their mortgage payments if interest rates were to increase upon their renewal. This new rule is aimed at protecting both lenders and home owners from defaulting mortgage payments, especially in the Toronto and Vancouver markets where housing prices have increased sharply in recent years.

What does this mean for you?

The bottom line is that many mortgage applicants will see a decrease in the amount of mortgage financing they are approved for. For example, qualifying at the Bank’s current posted rate of 4.64 percent means you would need to be able to afford higher monthly payments than if you were qualifying at the current rate of 2.44 percent being offered by many mortgage lenders.

2. Low Ratio Mortgage Insurance

If one makes a down payment of 20 percent or more on a home, their mortgage is considered “low-ratio.” As of November 30th, 2016, new restrictions will take effect regarding insurance for these types of mortgages.  In an effort to reduce government and taxpayer exposure to insured mortgages, insurance for low ratio mortgages will only be provided by government-backed insurers if the following criteria are met:
• A maximum amortization of 25 years 
• The purchase price of the home must be less than one million dollars
• The buyer must have a minimum credit score of 600
• The property must be owner-occupied

3. Capital Gains on Home Sales

As it stands, individuals are not currently required to report the sale of their primary residence as income on their tax return. Preliminary research on home sales and the capital gains tax exemption has led the government to propose measures that will modify tax rules for non-residents who buy and sell a property in the same year.  The CRA will require taxpayers to report the disposition of a property for which the principal residence exemption is claimed, and provide basic information.

4. Insured Mortgage Risk

The federal government currently assumes all of the risk in the event that a home owner defaults on an insured mortgage. A proposal is being put forward in the near future to outline the feasibility of dividing that risk between both the government and mortgage lenders. 
While we can’t predict the exact impact that all of these changes will have on the market, we anticipate the following effects post November 30th:  

a) Interest rates will increase as the cost of funds is higher when financial institutions are not able to sell as many mortgages in the secondary market as “MBS” (Mortgage-Backed Securities); and
b) Refinances that are conventional (more than 20% equity) that don’t fit the criteria outlined in rule change #2 above, will not be able to remain insured which may increase the cost to the lender- so the best rates may not be passed on to those who don’t fit these criteria.