Facts: The New Mortgage Rules in Canada
November 3 2016 Posted by Tracy Bennett
The Government of Canada’s New Mortgage Rules took affect October 17, 2016. Mortgages have become more difficult to obtain. Here are some details on the changes:
There is a new “stress test” to discover if a borrower can afford to repay their loan if the established rate was higher than what they currently pay (i.e. the buyer can still afford the house at renewal if mortgage rates rise to the Bank of Canada’s five-year fixed mortgage rate).
What’s the Stress Test?
Many lenders offer mortgages lower than the Federal Government “five-year standard rate” of 4.64% on a five-year loan. The new rules perform the test for all homeowners, even though in past years the test was only applied to particular segments of the housing market. Today, a buyer who puts down less than 20% of the home cost, which is an insured mortgage, will be stress tested under this rule.
For example, TD Bank provides a five-year fixed rate mortgage of 2.59%. So, any homeowner who has a lower rate will be “tested” to see if they can afford 4.64%. The test also stipulates no more than 39% of household income should be necessary to cover costs like mortgage payments, heat, and taxes.
How Do I Avoid These New Restrictions?
To avoid the new “test,” mortgage amortization period must be 25 years or less, the purchase price be less than $1 million, the property be owner-occupied, and the primary applicant has a minimum credit score of 600 and 20% or greater as a downpayment. Without the 20% down, there is no avoiding the Stress Test; it will be conducted by all lending institutions as a Compliance Rule.
Reporting to the CRA
The new rules also stipulate that beginning in the 2017 tax year, all home sales are to be reported to the Canada Revenue Agency. Gains from primary residence sales remain tax-free, but the Federal Government also aims to block foreign buyers who wish to buy and flip homes while (falsely) claiming a primary residence exemption from capital gains tax.
The Canadian Government claims it will shift some of the default against insured mortgages to banks and lenders, taking on 100 percent of the cost of a defaulted mortgage. How they plan to do that is not clear at this point.
Here is a breakdown of affordability for gross family income based on the stress test rate of 4.64%*:
|Annual Gross Income||Mortgage Balance||5% Down||Maximum Home Price||10% Down||Maximum Home Price|
* Due to property taxes estimates can vary