A Summary of This Year’s Major Changes to Canada’s Housing Rules
Every December, we look back and marvel at how fast the year went by. 2016 was no different but looking back, this year had a lot more changes than many others. There was Brexit, Summer Olympics in Rio de Janeiro, an unexpected Trump victory. Closer to home, several mortgage qualification and financial changes were also introduced and they are as follows:
A). CHANGES TO THE CAPITAL GAINS TAX EXEMPTION:
To benefit from the capital gains tax exemption, foreign buyers will now need to prove that a home they sell is their primary residence if they were not a resident in Canada in the year the individual acquired the residence. Canadian homeowners will also experience a change as they will need to fill out an extra form for the CRA during tax-time. For more information, I recommend consulting with an Accountant and/or reading more here.
B). CAPITAL REQUIREMENT COSTS FOR LENDERS WAS INCREASED:
What this means is that Lenders must now have more in reserves to cover the costs of loans that borrowers cannot repay. These reserves must also have good liquidity. This requirement should go into effect in January 2017 but it will likely make default insurance premiums (and possibly interest rates) increase. To learn about how this works in more detail, read here.
C). OCTOBER 17 – CHANGES TO QUALIFYING RATE FOR INSURED PURCHASES:
In a news release on October 3rd, several changes were introduced. For all high-ratio insured mortgages as of October 17th, Borrowers must now qualify under the new Stress Test, using the Mortgage Qualifying Rate (MQR) instead of the 5-yr fixed rate. The current MQR of 4.64% is slightly more than double the rate of today’s average 5-yr fixed rate. This change is to ensure that homeowners can afford mortgage payments even as rates increase. This change has resulted in greatly decreased buying power for many Canadians.
NOTE: High-ratio insured mortgages are loans where Borrowers put less than 20% down.
D). NOVEMBER 30 – CHANGES TO REFINANCES AND PURCHASES WITH < 20% DOWN:
Many non-Bank Lenders rely on something called “portfolio insurance” for low-ratio mortgages (ie. loans with 20% or more paid-in equity). “Portfolio insurance” is when Lenders bundle several low-ratio mortgages and pay for the default insurance (ie. CMHC) themselves. The subsequent benefits of reduced securitization costs and lower capital requirements that come with the insurance coverage far outweigh the actual cost of the insurance.
As of November 30th, default insurance (ie. CMHC) qualifying rules extended out to the low-ratio mortgages with “portfolio insurance. This is especially significant because insurance qualifying rules do not allow refinances, rental properties, properties with purchase prices over $1 Million, stated income products, and amortizations longer than 25 years (which were previously all typical low-ratio products).
What this means is that if a low-ratio mortgage is not eligible for “portfolio insurance”, Lenders’ costs to fund these types of loans will rise and, subsequently, Lenders will charge higher interest rates for these products.
To read more on the October 17th and November 30th changes, click here.
The above changes were implemented to slow the growth of insured loans in Canada and ensure that Borrowers can afford mortgage payments as rates increase. This also resulted in average mortgage rates increasing without the need for any sweeping fiscal policy changes, which would have impacted the broader economy and slowed business investment (which our Government is still trying to encourage).
The above immediately benefits:
- Banks, as they don’t require portfolio insurance and are therefore less affected;
- Homeowners in hot markets, as their property values will be better protected with the raised lending standards and lower household debt accumulation; and
- Taxpayers who will see their mortgage insurance risk reduce.
However, the changes negatively impact more groups than they benefit. Some of those affected are:
- First time home buyers finding it harder to qualify for a home;
- Current low-ratio borrowers who will no longer qualify for portfolio insurance;
- Homeowners who may find it harder to sell their properties as restrictions for buyers increase;
- Builders who may experience increasing difficulty in selling off inventory;
- Fewer financing options available for rental property investors; and
- Non-Bank Monoline Lenders, who often have more aggressive rates and lower penalties.
If you would like to discuss further how any of the changes may impact you or would like to know how much you qualify for now that the above changes have been implemented, please do not hesitate in contacting me at email@example.com OR 780-863-0700.