Changes to Canada’s Mortgage Rules - How will you be Affected?

Posted on 05 October, 2016

Canadian Finance Minister Bill Morneau recently announced four major changes to mortgage qualifying standards, set to start taking effect in just two short weeks on October 17, 2016. Below is an overview of the new legislation and how Canadians can expect to be impacted moving forward.

1. Mortgage Qualification Rate

Currently, mortgage financing applicants looking for a 5 year fixed rate only need to qualify at the current interest rate being offered by their lender. As of October 17th, all 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, many new home owners would 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 me?

The bottom line is that many 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 2.39 percent being offered by mortgage lenders.

If you are currently house shopping and you have obtained a mortgage pre-approval, your pre-approval may be affected unless your mortgage closes before the new rule changes take place this month. If you are a current Innovative client with a mortgage pre-approval, your Broker will contact you regarding the details of your pre-approval and whether your application has been affected or not.

2. Low Ratio Mortgage Insurance

If you plan to make a down payment of 20 percent or more on a home, your mortgage is considered “low-ratio.” As of November 30, 2016, new restrictions will be taking effect regarding insurance for these types of mortgages. In an effort to reduce government exposure to homes valued over one million dollars, insurance for low ratio mortgages will only be provided by government-backed lenders 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

What does this mean for me?

As a current or prospective home owner, you have likely heard of paying mortgage insurance if you have a “high ratio” mortgage – that is, if you put down less than 20 percent on your home. However, there are some Canadian lenders that are backed by one of the three main insurance providers through the federal government regardless of whether your mortgage is low-ratio or high-ratio. These providers are CMHC, Genworth and Canada Guaranty. Moving forward, all lenders who are backed by one of these three insurance providers will only be able to offer you low-ratio mortgage products that meet the above criteria.

There are some Canadian lenders who are not backed by the federal government for low-ratio mortgage products and therefore are not affected by these new restrictions. Talking to your Mortgage Broker about your personal financial scenario can help you determine whether your financing application will be affected by these new rules.

3. Capital Gains on Home Sales

As it stands, you are not currently required to report the sale of your primary residence as income on your tax return. Preliminary research on home sales and the capital gains tax exemption has led the government to put measures into place that will prevent foreign buyers from purchasing Canadian real estate, flipping these properties and claiming the tax exemption that they are not entitled to receive.

What does this mean for me?

From the 2016 tax year on, home owners will be required to report the sale of their primary residence to the Canada Revenue Agency when they file their income tax. The capital gains tax will still be waived, so the sale of your home will remain tax-free but the sale itself must be reported.

4. Insured Mortgage Risk

The federal government currently assumes all of the risk in the event that a home owner defaults on their 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.

What does this mean for me?

While it is still too early to definitively state how home buyers will be affected, increased risk being taken on by lenders may translate into increased interest rates and perhaps even stricter financing requirements in the future.

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