This year has seen Canadian real estate prices go through the roof (pun intended),
with price increases of 25% to 30% in many of the top markets. As a result of this
overheating, the Office of the Superintendent of Financial Institutions (OSFI) recently
proposed raising the minimum qualifying rate for uninsured mortgages to 5.25%.
This is a significant uptick from the current 4.79% benchmark rate used by the major
banks for stress-testing the finances of new home buyers.
What the new rules mean is that buyers who are applying for an uninsured mortgage
will need to pass a tougher stress test and show a lender that their income supports a
mortgage loan at the offered rate plus 2% or 5.25%, whichever is higher.
Whether this new mortgage rule will help dampen the current frenzy in the real estate
markets is unclear. That said, experts are estimating that this move will lower
homebuyer’s purchasing power by approximately 4% to 5%.
Other ideas that have been floated for curtailing unsustainable increases in home
prices include removing the capital gains exemption from primary residences.
New Mortgage Rules 2021
Below are some other mortgage rules that apply in 2021:
1. Homebuyers will need at least a credit score of 680. This is 80 points up from the
previous requirement of 600. If a couple is buying a home, one of the applicants must
have a credit score of at least 680.
Don’t know what your credit score is? You can check it here for free.
2. The maximum gross debt ratio (GDS) is limited to 35% (down from 39%) and the
maximum total debt service ratio (TDS) is now 42% (down from 44%).
Effectively, you will need to show that a smaller percentage of your income is required
to pay off your debts.
3. Borrowed funds will no longer count towards your downpayment or count as equity
when considerations are being made for your mortgage default insurance.
While these changes will definitely impact some homebuyers, it is not as bad as it
sounds. There were initial fears that the minimum downpayment amount was going to
be raised from 5% to 10%.New Mortgage Rules 2019-2020
The CMHC announced new mortgage rules that took effect on July 1, 2020. These
changes tighten CMHC requirements and are aimed at discouraging higher-risk
borrowers from taking on a mortgage they can’t afford.
A higher risk borrower is a homebuyer with less than 20% home down payment.
While these new rules were forecasted to result in house prices declining across the
board by 9% to 18%, this did not materialize.
There have been several changes to the mortgage rules in Canada over the last 3
years. The most recent and future changes popped up in the 2019 federal budget i.e.
the First Time Home Buyer Incentive which is aimed at helping first-time
homebuyers afford a home in Canada’s ‘hot’ real estate market.
This program would be administered via the Canada Mortgage and Housing
Corporation (CMHC) and provide up to $1.25 billion to eligible homebuyers over 3
years. Some of the proposed eligibility requirements for the program are:
• Households with incomes less than $120,000 can qualify to receive a 5-10%
incentive (like an interest-free loan) towards their home purchase.
• Homebuyers must have a minimum downpayment of at least 5% (insured
mortgage).
• The maximum mortgage value plus CMHC loan is capped at around $560,000.
For example, on a $400,000 resale home, after deducting your 5% down payment
($20,000) and 5% incentive ($20,000), your mortgage amount is reduced to
$360,000. This could lower your monthly mortgage bill by $120 from $1,971 to $1,851
(using a 3.49% mortgage rate).
If it is a new home that qualifies for the full 10% incentive (i.e. $40,000), your
mortgage amount falls to $340,000, potentially saving you $228 per month (mortgage
payment falls from $1,971 to $1,743) or $2,736 per year. These can result in significant
savings over time.
Homeowners who take advantage of the plan can repay the loan at any time and it
does not bear interest. The loan (incentive) must be paid up within 25 years or when
the house is sold. The First-Time Home Buyer Incentive Program came into effect on
September 2, 2019.
In the 2019 budget, there are also plans to increase the RRSP Home Buyers’
Plan from $25,000 to $35,000. This means that couples will now be able to withdraw
up to $70,000 from their RRSP to put towards a home purchase tax-free.
Rule Changes in the Canadian Real Estate Market (2016-2018)In 2017, the Office of the Superintendent of Financial Institutions (OSFI) introduced
new mortgage rules that became effective starting January 1, 2018. The new rules
require that uninsured mortgages i.e. mortgages where the home buyer has a down
payment of 20% or more, now pass the same “stress-test” required for high-ratio or
insured mortgages.
The “stress-test” essentially means that all homebuyers must qualify for mortgage
loans at the higher of the Bank of Canada’s five-year benchmark rate (currently 5.14%
– April 1, 2018) or the mortgage rate offered by their lender plus 2% points.
A few changes have been effected in the real estate market over the past year,
including:
• A stress test for all insured mortgages where the home buyer has less than 20%
down payment, with new buyers having to qualify for mortgage loans at the Bank
of Canada’s (BoC) benchmark rate – effective November 2016.
• Restriction of mortgage insurance to owner-occupied dwellings, shorter
maximum amortization period, a purchase price of less than $1 million, and a
minimum credit score of 600.
• A maximum Gross Debt Service ratio of 39% and Total Debt Service ratio of 44%
– calculated using the higher stress-test rates.
• Increase in the mortgage default insurance premium payable on insured
mortgages to as high as 4% – effective March 2017.
• The imposition of a 15% foreign buyers tax in British Columbia (August 2016) and
Ontario (April 2017), plus other control measures.
• A similar stress-test for uninsured mortgages where the buyers have 20% or more
of their down payment – starting January 2018.
• A stress-test will also be conducted when homeowners who are refinancing their
mortgage change lenders.
• Individuals selling real estate in British Columbia are now required to disclose
their residency status in Canada for tax purposes. This is to ensure that foreigners
or non-tax residents do not avoid paying taxes on capital gains resulting from the
sale of property designated as a principal residence – effective November 27,
2017.
• A new “speculation tax” in B.C. that imposes a 0.5% tax (for 2018) on the assessed
value of homes that are owned by non-residents (or vacant) was unveiled in the
B.C. Budget announced on February 20, 2018. The tax will increase to 2.0% in
2019.
• The foreign buyers’ tax of 15% that was introduced in British Columbia in 2016
has now been increased to 20% as of February 21, 2018. The area of coverage for
the tax has also been widened to include Metro Vancouver plus the Capital
Regional District, Fraser Valley, Central Okanagan, and the Nanaimo Regional
Districts.
Drivers of these changes have largely been due to the increasing and unsustainable
indebtedness of Canadian households, soaring house prices in Ontario and B.C., and
the potential risks posed by these issues to the general economy.What the “stress-test” accomplishes is that it ensures homeowners can afford to pay
their mortgage loans even if rates go up. And, speaking of rates going up, the bank of
Canada has already raised its key interest rate twice this year (currently at 1%). More
increases are likely as the economy continues to improve, and mortgage rates will
definitely follow suit.
Potential Impact of New Rules
Increased regulation in the housing market often has a predictable outcome, at least
in the short term.
Generally, it’s likely we will see the following:
• Increased demand for homes in November and December 2017 as individuals
with pre-approved mortgages rush to close.
• Increased activity in the cheaper homes category and less activity in pricier
categories. New homebuyers will qualify for lower mortgage loans when the new
rules come into effect.
• Some slow-down in the growth rate of house prices (year/year), especially in
areas like Toronto and Vancouver.
• Increased patronage of lenders who are not federally regulated, such as credit
unions.
Mortgage Professionals Canada (MPC) released a report on December 5, 2017,
estimating that the new stress tests that are coming into effect on January 1, 2018, will
very likely have a negative effect on the real estate market. Some of their estimates
include:
• Approximately 18% of annual mortgage borrowers (or 100,000 home buyers) will
likely fail the new stress tests.
• 50,000 to 60,000 potential home buyers per year will likely have to settle for a
cheaper house that is not necessarily what they would have otherwise opted for.
• 40,000 to 50,000 prospective home buyers per year will likely be unable to buy a
house at all.
• Between now and the end of 2019, as many as 200,000 homeowners will fail the
stress test at the time of their mortgage renewal, causing them to have to look for
less competitive mortgage rates.
• There will likely be an increase in the number of prospective homebuyers who will
turn to credit unions (not federally regulated) and mortgage investment
corporations (not provincially or federally regulated).
MPC is Canada’s national mortgage broker industry association and they are definitely
fighting for the interest of their group members. Based on some of the stats in the
report, some of their estimates are definitely possible. However, no one can say for
sure how the real estate market as a whole will react to the new rules.
Mortgage Affordability under the New Rules
An example using Ratehub’s Mortgage Affordability calculator:Old Rules: Assuming a 20% down payment, 5-year fixed mortgage rates of 2.84%,
and a 25-year amortization; a family with an annual income of $100,000 can afford a
home worth $693,405.
New Rules: Applying the new “stress-test”, the family must qualify for the mortgage
using the greater of 4.89% and 4.84% (calculated as 2% + 2.84%). Therefore, with a
20% down payment, a 5-year fixed rate of 4.89%, and a 25-year amortization, the
family can now afford a home worth $591,537.
The difference is that under the new rules, the family’s affordability has dropped by
$101,868 (-15%). A bank that was willing to lend them $700,000 before is now only
able to loan them approximately $600,000.
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