First of the announced changes to mortgage rules in Canada came into effect yesterday.
Up until now, buyers with a down payment of at least 5 per cent of the purchase price but less than 20 per cent had to be backed by mortgage insurance, which is called a "high loan-to-value" or "high-ratio" mortgage. In situations where the buyer had 20 per cent or more, the lender or borrower could obtain "low-ratio" insurance which covers 100 per cent of a loan in the event of a default.
Here's what's changed as of yesterday:
- all new mortgages will come with a stress test used for approving high-ratio mortgages, including those with 20 per cent downpayment. The buyer has to qualify for a loan at the negotiated rate in the mortgage contract, but also at the Bank of Canada's five-year fixed posted mortgage rate, which is the average of the posted rates at the big six Canadian banks and it's usually higher, as of Sept 28. the rate was at 4.64 per cent
- the stress test also serves to ensure that the home buyer will be spending no more than 39 per cent of their income on costs like mortgage payments, heat and taxes
- another measure is "total debt service" and it includes all other debt payments and the TDS ratio must not exceed 44 per cent
Another change will come into effect on November 30th. This new rule will restrict insurance for low-ratio mortgages based on new criteria:
- the amortization period has to be 25 years or less
- the purchase price less than $1 million
- the buyer's credit score must be at least 600
- the property will be owner-occupied
The third change will affect anyone who sells their primary residence. These sellers will have now have the obligation to report the change to the CRA. At the moment, any financial gain from selling your primary residence is tax-free and it doesn't have to be reported as income. Starting with this tax year, the gain is still tax free, but it has to be reported at tax time to the Canada Revenue Agency.
The last and the most important change comes in a form of a precaution. The federal government is making sure it will have limited financial duty in case of a nationwide mortgage defaults. Banks, directly affected by this enactment, will have to take on higher risks, which can eventuate in higher mortgage rates for consumers.
The Department of Finance admits it to be “a significant structural change to Canada’s housing finance system” and also one-of-a-kind in international finance.
It seems that these new mortgage rules will mostly affect 1st time buyers and they are the ones that move our markets. News from the rate pundits seems to say that it may be another 2 years before rates go up so bringing in these new rules may have been premature.
It will take a while to see what these new rules will bring in terms of change but they really are going to be making it harder on buyers who may decide that rental is their only option. It should push rentals even higher and may have a strong reaction with the condo market as being a rental option.
This will drive up rental demand, especially in the condo segment and also will likely entice condo investors to continue to purchase pre construction condos since rental demand will continue to increase (with tight vacancy rates already) and rental prices increasing.
It is no surprise to me that the Goverment decided to step in and is trying to control our heated market. Actually,since the beginning of the year, most banks have already been tightening up lending policies and slowing down the turn over time for new applicants. BMO started to request a guarantor on international students' applications since March. RBC would request much more financial information for the new immigrants who landed in Canada less than five years ago than for Canadian citizens. They never asked for the proof before as long as new immigrants had a 35 per cent downpayment. All of those were signs that someone is trying to cooling down the market. I think there will be even more rules coming, if these rules don't work out.