New Mortgage Rules Explained
Over the past few weeks I’ve been getting a lot of questions about the new mortgage rules announced earlier this month. I thought it would be helpful to provide some clarification.
1. Expanded stress test to include all new insured mortgages.
Before the new legislation, applications for insured high-ratio mortgages (less than 20 per cent down payment) were stress tested to ensure the borrower could handle an interest rate increase.
Now applications for ALL insured mortgages will be subject to a stress test. As well as qualifying at the negotiated mortgage rate, borrowers will have to qualify at the Bank of Canada five-year fixed posted mortgage rate, which is generally a couple of percentage points higher.
Additionally, the borrower’s total Gross Debt Service Ratio (percentage of gross annual income spent on housing expenses such as taxes, hydro and mortgage payments) must not exceed 39% and their Total Debt Service Ratio (same as above but including all other debts such as car loans, student loans or credit cards.) must not exceed 44%.
The impact of all of this will mean a reduction in the amount borrowers will qualify for. First time home buyers, who are already struggling to buy into a seller’s market, will be hardest hit by this change.
2. New criteria for insurance on conventional mortgages
Before the new legislation, conventional insured mortgages were exempt from some of the restrictions placed on high-ratio insured mortgages,
Now there are a number of criteria restricting the insurance for even low ratio mortgages such as:
- amortization period of less than 25 years,
- purchase price of less than $1 million,
- borrower credit score of 600 or higher, and
- property must be owner-occupied.
These changes are intended to limit the government's risk exposure in overheated, high-priced markets like Toronto and Vancouver.
3. Reporting sale of primary residence to the CRA.
Before the new legislation the sale of a primary residence was exempt from capital gains tax and therefore not reported to Revenue Canada .
Now the sale of a primary residence must be reported to Revenue Canada, however the sale is still exempt from capital gains tax.
This change is intended to expose non-resident speculators who might be claiming a primary resident tax exemption.
4. “Lender risk sharing” on the horizon?
Currently the Canadian government shoulders 100 per cent of the risk in the event of default on an insured mortgage. This is not the norm internationally.
The government is proposing that Canadian mortgage lenders should share some of the risk.
If, in future, mortgage lenders do assume a greater risk, the added cost to them will be passed on to borrowers either by interest rate hikes or other fees.
1. Expanded stress test to include all new insured mortgages.
Before the new legislation, applications for insured high-ratio mortgages (less than 20 per cent down payment) were stress tested to ensure the borrower could handle an interest rate increase.
Now applications for ALL insured mortgages will be subject to a stress test. As well as qualifying at the negotiated mortgage rate, borrowers will have to qualify at the Bank of Canada five-year fixed posted mortgage rate, which is generally a couple of percentage points higher.
Additionally, the borrower’s total Gross Debt Service Ratio (percentage of gross annual income spent on housing expenses such as taxes, hydro and mortgage payments) must not exceed 39% and their Total Debt Service Ratio (same as above but including all other debts such as car loans, student loans or credit cards.) must not exceed 44%.
The impact of all of this will mean a reduction in the amount borrowers will qualify for. First time home buyers, who are already struggling to buy into a seller’s market, will be hardest hit by this change.
2. New criteria for insurance on conventional mortgages
Before the new legislation, conventional insured mortgages were exempt from some of the restrictions placed on high-ratio insured mortgages,
Now there are a number of criteria restricting the insurance for even low ratio mortgages such as:
- amortization period of less than 25 years,
- purchase price of less than $1 million,
- borrower credit score of 600 or higher, and
- property must be owner-occupied.
These changes are intended to limit the government's risk exposure in overheated, high-priced markets like Toronto and Vancouver.
3. Reporting sale of primary residence to the CRA.
Before the new legislation the sale of a primary residence was exempt from capital gains tax and therefore not reported to Revenue Canada .
Now the sale of a primary residence must be reported to Revenue Canada, however the sale is still exempt from capital gains tax.
This change is intended to expose non-resident speculators who might be claiming a primary resident tax exemption.
4. “Lender risk sharing” on the horizon?
Currently the Canadian government shoulders 100 per cent of the risk in the event of default on an insured mortgage. This is not the norm internationally.
The government is proposing that Canadian mortgage lenders should share some of the risk.
If, in future, mortgage lenders do assume a greater risk, the added cost to them will be passed on to borrowers either by interest rate hikes or other fees.
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