4 New Mortgage rules in Canada are coming!
4 New Mortgage rules in Canada are coming!
The newest one actually starts today! Sorry for not giving you a better heads up, but hopefully it’s not too late to let you know about the changes that are coming/here. There are currently 4 new mortgage rules that will be coming into effect over the next few months.
Many people maybe wondering why change the mortgage structure? Well, I don’t really know either, let’s look at a few facts about our economy. Canadian household debt to disposable income has risen to 165.3%. This is just slightly less than the all time high of 165.4% in late 2015. Meanwhile housing pricing are going nuts in Toronto, Vancouver, Victoria and Hamilton. All of those cities’ housing prices have seen double digit growth over the past year. Vancouver is seeing a 22% increase! But even with all that, mortgage rates are the lowest they’ve been in a long time. Just like the USA in 2008!…oh wait…I think I see the issue now.
So what are the new mortgage rules and how are they going to affect us?
A new stress test for all insured mortgages to ensure you don’t default if rates rise slightly
Basically all new insured mortgages will have to pass a stress test and qualify for their mortgage at the Bank of Canada’s 5 year posted rate. This is a test that is currently in place for high ratio mortgages with variable rates. It’s also applied to fixed rate mortgages with a term of less than 5 years.
This rate could be the rate they’re getting or it could be much more. Right now as I am writing this the rate is 4.64%. Several lenders are currently offering rates in the 2.5% range. The Bank of Canada’s 5 year is updated weekly on their website.
To qualify for mortgage insurance, you’ll have to meet two debt service requirements. A Gross Debt Service (GDS) ratio of less than 39% and the Total Debt Service (TDS) ratio less than 44%. The GDS is defined as the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the home buyer’s income. Where the TDS is the carrying costs of the home and all other debt payments relative to the home buyer’s income.
How does this help the markets you may be wondering? Well, this most certainly reduce the number of people that end up defaulting on their mortgages because people won’t be able to leverage themselves as heavily. It will result in less foreclosures. It may also have a few other effects. Since people can’t qualify for as large of a mortgage as they could previous to October 17th, 2016 we may see an adjustment in housing prices.
Changes to low ratio mortgage insurance requirements
Effective November 30, 2016 low ratio mortgages that are insured through lenders using portfolio insurance or other means will need to meet more stringent requirements. The new mortgage rules for this type of lending are as follows:
- A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
- A maximum amortization length of 25 years;
- A maximum property purchase price below $1,000,000 at the time the loan is approved;
- For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;
- A minimum credit score of 600 at the time the loan is approved;
- A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
- A property that will be owner-occupied.
How does this help? Basically to me it’s the government limiting their exposure to high value properties. By not insuring anything with a maximum purchase I don’t see this affecting the majority of the population. I think most people don’t get low ratio mortgages to start, but they certainly should.
Consultations on lender risk sharing will be implemented
The federal government is currently 100% responsible for mortgage default insurance. Apparently this is unique throughout the developed world. (We’re #1!…of 1…) This probably worries them as they’re planning to launch public consultations to find out pros and cons to distribute this risk. Their talking about distributing the risk of this insurance to other financial institutions, mostly likely the major banks.
How will this affect us? I have no idea. Consultations are a good thing instead of just implementing new rules. My only fear is that somehow the major banks screw the system similar to the way the American banks did prior to 2008.
New income tax measures.
As of this tax year homeowners will have to report the sale of their primary residences. This still is going to be exempt from any capital gains.
Not a big change here, the general outcome is just data. The Canadian government will now have data of who’s selling their homes as primary residences. This will probably allow them to crack down on foreign buyers. A hot topic in Vancouver and Toronto where foreigners are purchasing multi-million dollar properties and selling them exempt of capital gains, which they are not allowed to do.
So there’s the new mortgage rules…
How do you guys feel about them? Are they going to affect you? Do you see it being a step in the correct direction to keep the Canadian housing market from collapsing? Or at least the Vancouver and Toronto markets from collapsing? Does it put you into a different market for your first home? So many questions! Let me know in the comments!