Last couple of weeks there has been a lot of buzz around the new mortgage rules that will be taking effect today. With a stagnant economy where every dollar counts, some buyers could find themselves with less borrowing power due to these new mortgage rules. So what exactly was announced?
The changes are an attempt to cool off what is believed to be an overheated Canadian real estate market, in particular Toronto and Vancouver. It is also an attempt to ensure that Canadians are not taking on commitments that they’re unable to sustain when the Canadian economy improves and interest rates potentially rise.
Here is a breakdown of the several important changes in the mortgage rules:
- Changes on Foreign Ownership: There have been many non-Canadian residents who are purchasing homes and benefitting from not paying capital gains tax. For the new rule, an individual who was not a resident in Canada in the year they purchased the home, they will not be able to claim the exemption for that year.
- Stress Testing Affordability: To ensure homeowners are able to maintain their mortgage payments, lenders will now need to qualify their clients at the Bank of Canada’s posted rate. This means applicants will be able to qualify for less than they did prior to the rule changes. For example, if a couple who could qualify for a mortgage of $600,000 with a 2.29% interest rate today, with the new rules they would only qualify for around $463,000. At the posted rate of 4.69%. The rates are still very low and have not risen, the posted rate is only used during the “stress-test”
- Tighter Mortgage Insurance Rules: Most people are aware that if they have less than 20% as a down payment they will be required to pay for mortgage protection insurance from CMHC or Genworth. What many don’t know is that even if they do put 20% down most lenders will still get insurance on the mortgage but will cover the costs themselves. By insuring these mortgages, the lenders are able to keep their lending rates low. These new rules have several restrictions on Monline lenders (not banks) which include: Maximum amortization length of 25 years; Maximum property purchase price of $1,000,000; Minimum credit score of 600; and Property must be owner occupied. Please note that this new rule does not affect people who are putting 20% down and it also does not mean that you have to put 20% in today’s market.
These are the several changes that will be taking place today and the true effect it will have on the housing market will need to be seen.
Presently the new rules would have the biggest impact on first time home buyers. There is no question that some young Canadians that were considering or ready to buy a home, may now have to wait until they make a higher income or have a stronger down payment. That being said, first time home buyers are a predominant group in our real estate market so I would expect an adjustment period at first.