The most common mortgage in Canada is the five –year fixed-rate closed mortgage. The federal government created the Canada Mortgage and Housing Corporation (CMHC) in 1946 as the countries national housing agency. This agency provides Canadians with mortgage loan insurance, housing policy programs, housing research and mortgage –backed securities.
The Office of the Superintendent of Financial Institutions Canada announced new mortgage rules that came into effect on January 1st, 2018. They require all federally regulated financial institutions to vet borrowers’ applications using a minimum qualifying rate. This minimum qualifying rate should be equal to the greater of the bank of Canada’s five year benchmark rate (currently 5.34%) and the contractual rate plus two percentage points. These rules not only affect insured buyers putting less than 20% down but also uninsured buyers putting down more than 20%. These new rules significantly affects all the Canadians that are renewing or refinancing their mortgages.
Effect of the new mortgage rules to Canadians
Canadians are required to pass a minimum mortgage qualification rate i.e. Stress test, that proves their ability to handle interest rate hikes that are considerably higher than their current rates. An additional cost of an insured mortgage of about $5 per month will be added to the Canadian buying a house with CMHC insurance agency.
It will be very challenging for a Canadian to refinance or renew a mortgage with a new lender.
Canadians planning on refinancing their mortgage will have to qualify based on the higher stress-state rates rather than their existing contractual mortgage rates(“New mortgage rules 2018,” 2017).
Canadians are expected to build up more equity for them to qualify for a mortgage refinance which is a difficult task.
Canada’s strict mortgage lending rules makes it tougher for Canadians to even qualify for a home equity line of credit (HELOC) because when you apply, two percentage points are added to the current lending rates by the banks.
Most Canadians are not able to live in their dream homes and are forced to purchase smaller homes or continue renting.
These new mortgage rules apply also to Canadians financial institutions under federal regulations. Many are also turning to financial institutions that are not federally regulated such as Credit Unions, as they do not have to follow the new federally regulated stress test.
New mortgage rules Impact on down payments
According to this change of mortgage rules, buyers need to have a larger down payment to qualify for a mortgage.
Buyers have to put down more money on a down payment for them to pass the stress test.
Laird says, the effect of these new mortgage rules is huge and results into 20% decrease in affordability meaning any first time home buyer is only able to buy a 20% less home.
First time purchasers are significantly affected because no matter their amount of down payment they still have to pass the stress test. This discourages them and as a result some of them pull out of entering the market. About 10 years ago, I personally bought a property with 30% down and no income straight out of school; today, this would not be possible.
New mortgage rules effect on real estate
These strict mortgage rules aim at making the Canadian real estate markets better and more stable by ensuring borrowers can afford the homes they desire to purchase if rates rise in the future.
The competition of limited number of homes for sale experienced in major urban centers like Montreal, Toronto and Vancouver will be reduced. These highly competitive real estate markets results in prices soaring and risks creating a real estate bubble.
When selling a home Canadians are now required to declare the sale of their principal residence. It will be interesting to see the outcome of CRA tracking this information; perhaps house flippers or speculators will be more easily identified.
Through these new mortgage rules, the Canadian Federal government is able to prevent non-residents from evading paying taxes when they are selling homes.
Only residents who live in Canada the year the home is bought will be able to access capital gain tax exemptions upon the sale of a principal residence.
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REFERENCES
https://globalnews.ca/news/4097215/canada-new-mortgage-rules-stress-test-2018/
https://globalnews.ca/news/3897942/new-mortgage-rules-2018-canada-guide/
https://www.moneysense.ca/news/what-the-new-mortgage-rules-mean-for-homebuyers-in-2018/
New mortgage rules 2018: A practical guide – National | Globalnews.ca. (2017, December 10). Retrieved October 17, 2018, from https://globalnews.ca/news/3897942/new-mortgage-rules-2018-canada-guide/
What the new mortgage rules mean for homebuyers. (n.d.). Retrieved October 18, 2018, from https://www.moneysense.ca/news/what-the-new-mortgage-rules-mean-for-homebuyers-in-2018/