It’s been a long way coming and the new rules are finally here to help deter the market from being a run away freight train. The new mortgage rules were just announced on October 3, 2016 and we’ve been following them closely to see what they would mean for buyers and sellers in this market.
Here’s a recap of the new rules that are coming into place
- New rules will set more uniform standards for all insured mortgages across canada
- Stress test will be standardized for all insured mortgages
- Ottawa will be changing the taxation system to close the loophole allowing non-residents to declare their properties as primary residence hence loosing out on capital gains
Starting on October 17, 2016, all new mortgage borrowers with a down payment of less than 20% and seeking mortgage insurance (high-ratio mortgages) will be required to qualify at the posted rate for a conventional mortgage for a five-year term (presently 4.64%) or the contract rate, whichever is higher. Currently, this qualifying requirement is imposed only on insured mortgages with a variable rate or a fixed rate with a term of less than five years. Moreover, effective November 30, 2016, the standards for low-ratio mortgage portfolio insurance will be same as those for insured high-ratio mortgages. This means that mortgages in a portfolio to be insured will be restricted to 25 year in length of amortization, a maximum of $1,000,000 in value, a credit score of 600 or higher, and a maximum Gross Debt Service of 39% and Total Debt Service of 44% calculated with the posted rate for a five-year conventional rate or the contract rate, which ever is higher.
Let’s look at the affordability change for a family based on the new measures based on an example. Let’s say the Jones are looking to purchase a home in Toronto. The couple makes about $110,000 with $80,000 for downpayment and closing. Based on a 2.5% rate they would’ve qualified for $700,000 in mortgage but under the new rules, the qualifying rate would be 4.64% (posted rate) which would reduce their mortgage approval to $570,000, which is $130,000 less than what they qualified for before.
If you’re in the market to purchase, this would be a good time to check in with your mortgage broker to make sure you still qualify for the same amount you were pre-approved for.
There were new rules also announced to help curb some of the real estate run up caused by international buyers. One of the reasons that international buyers found Canada as a safe haven is, of course our solid banking system, also non-residents can claim a principal residence in Canada and it would be capital gain exempt. Instead of taxing all non-residents who own properties much like in Vancouver, Minister of Finance, Bill Morneau, will be closing the loophole making sure any purchases made by non-residents will be taxed appropriately hence curbing any speculators who are investing in the market to generate profits. This would also apply to any non-residents that currently own properties and wouldn’t be able to claim the property as exempt.
There are other factors that could effect the value of real estate in Toronto such as interest rates, immigrations and employment with interest rates being the focus over the next two years. Any increase in rates would definitely reduce affordability further putting down ward pressure on prices. Based on reports that I’ve read, it seems that a rate increase won’t be likely till next year but it is coming!
What are your thoughts on the market and new rules? Share this post or leave a comment below to discuss.