If you are a first time home buyer, or a repeat buyer looking to get into the detached housing market, the new policy could significantly effect how much you qualify for.
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Finance Minister Bill Morneau has announced new measures Monday aimed at ensuring Canadians take on mortgages they can actually afford amid concerns over soaring housing prices in Toronto and Vancouver.
“Across the country, many middle-class families looking to buy their first home see prices climbing often out of their reach. Some are taking on high levels of debt in a rush to buy before it’s too late,” Morneau said Monday during a press conference in Toronto.
Morneau said the new rules around mortgage insurance eligibility would come into effect later this month and include a “more robust” mortgage “stress test” that will ensure a borrower can make their mortgage payments if interest rates go up or their income goes down.
New rules mean mortgages may be more difficult to get
The changes mean home buyers will have to qualify for a more expensive loan, even if they don’t have to make higher payments.
Borrowers would be tested on their ability to pay their mortgage if rates were as high as the five-year posted mortgage rates among Canada’s largest banks, which currently average 4.64 per cent according to the Bank of Canada.
The requirement was already in place for “high-ratio mortgages,” and people who make small down payments. It wasn’t required for fixed-rate mortgages longer than five years.
But starting Oct. 17, the strengthened mortgage rate stress test will be required on all new insured mortgages.
RBC chief economist Craig Wright said the new stress test will make it more “challenging” for homebuyers to qualify for a loan.
“The federal government is tightening up the overall regulatory environment for mortgages,” Wright said. “It translates into a more challenging environment for those individuals looking for a mortgage whether it is availability of mortgages or indeed pricing.”
“The attempt is to cool the housing market in a controlled manner and part of those efforts involve making mortgages a little more difficult to have access to.”
Here is a breakdown of how the new rules would affect a monthly payment on a home valued at $700,000.
- House price: $700,000
- Down payment: $140,000
- Loan value: $560,000
- Mortgage: 5-year fixed at 2.17% (according to interest rate-comparing website RateHub.ca)
- Monthly payment: $2,418
- Stress test rate: 4.64% (five-year posted rate by Canada’s big banks)
- Stress-tested monthly payment: $3,143
And starting Nov. 30, mortgage loans insured using portfolio insurance (mortgage default insurance) will need to meet loan eligibility criteria that previously only applied to highly leveraged insured mortgages, including a maximum amortization length of 25 years and minimum credit scores.
Craig Alexander, the chief economist with the Conference Board of Canada, said the new rules will have an “incremental impact.”
“I don’t think it’s going to push many Canadians out of the housing market,” Alexander said. “And quite frankly if Canadians can’t meet the financial obligations at the five-year posted rate they really shouldn’t be getting the mortgage even if they are getting it at a lower rate.”
Ottawa also announced Monday it is closing a tax loophole that allowed homeowners to avoid paying capital gains tax on the sale of a home as long as they were living in it.
Morneau said the exemption will now be available only to Canadian residents.
The new policy is aimed at slowing foreign money that has contributed to red-hot real estate markets like Toronto and Vancouver.
The move follows B.C. adding a 15 per cent tax on foreign buyers in an attempt to cool the overheated markets.
-With files from the Canadian Press and Global News
*from Global News October 3rd, 2016 (inclds video at below link)