New Mortgage Rules in Canada and How they Affect You2017-03-08 08:54:08 Posted By Amir Hamzehali
Buying a new home is a major event. Excitement mixed with anticipation—and the sobering effect of great responsibility.
Unfortunately for some, Canada’s new mortgage rules may price some potential homebuyers out of the market. The government is particularly concerned about the cities of Toronto and Vancouver, where it is feared that homeowners may be stretched too thin, financially.
Let’s take a look at what these changes are and what they mean for you:
- Expanded mortgage rate stress tests. This test that was previously only for high-ratio mortgages now applies to all new insured mortgages. The purpose of the stress test is to give the lender confidence that the buyer could still afford the home if interest rates were to go up. The new rules require that home buyers spend no more than 39% of their income on their mortgage, plus other necessary household expenses.
○ This affects potential home buyers who have 20% to put down but may not be able to afford the home if interest rates were to rise.
- Insurance for low-ratio mortgages. The new criteria for this type of insurance affects the amortization period, which can’t be more than 25 years. It also states that homes must be less than one million dollars, buyers must possess a credit score of 600 or more, and the property must be occupied by the owner.
○ This affects home buyers who were counting on this type of insurance but no longer fall within the new parameters.
- Reporting rules for residence capital gains. The profit you make from selling your house will remain tax-free, though the reporting rules have changed. Sales of your primary residence now will need to be reported at tax time.
○ This change will affect anyone who sells their home because they will now be obligated to report the sale to the Canada Revenue Agency at tax time.
- Governmental risk. Banks and other lenders will begin taking on more of the risk associated with a defaulted loan. Previously, the Federal Government had assumed 100% of the debt, but their efforts are now focused on preventing a large hit to the economy if widespread mortgage defaults occur.
○ Banks and other lenders taking on more of the financial responsibility of a default has the potential to result in higher interest rates for home buyers.
The bottom line
The government is ultimately attempting to reduce the risk of instability in the financial system. The effect it will have on homebuyers remains to be seen, though it is likely some potential homeowners will be priced out of the market.
When competition is limited, interest rates rise and there are fewer loan approvals, meaning fewer people are able to purchase a home. It appears the most affected group of people are those who would have been home-shopping in the lowest price ranges. Time will tell if these changes will have the desired effect of lending stability to Canada’s financial system.