Last week (Oct. 2016), the Federal government announced tighter mortgage rules that will affect home buyers, especially First Time Homebuyers.
The tightened mortgage lending rules will limit the amount many Canadians can borrow to help ensure that when interest rates rise, they’ll still be able to make their payments. These new rules take effect Oct 17, 2016
Under the new rules, there is a stress test for all home buyers that are putting less than 20% down. The stress test is where borrowers must qualify for their mortgage using a higher interest rate than they will actually be paying on their mortgage.
Currently the 5 year fixed rate is around 2.5% for most lenders.
The Bank of Canada’s posted rate that will used for the stress test is 4.64%.
Meaning that home buyers are now qualified at the 4.64% rate but their actual mortgage rate may be 2.5%.
They aren’t paying more for their mortgage payment, but they will qualify for less of a home purchase.
Under the old rules, a Canadian household income earning $70,000 with 5% saved down with $500/month debt payments of a car loan and credit card debt would previously qualify for a $370,000 home at the rate of 2.44%.
After Oct 17, this homebuyer would qualify for a home worth $280,000 using the stress test rate of 4.64%.
Qualifying at the higher interest rate is not necessarily a bad thing because the low interest rates we currently have aren’t the norm.
Rates between 4-6% are normal, but over the last few years, Canadian homeowners have been enjoying these super low rates.
This move is to help prepare homeowners in case rates rise.
Two other Mortgage Rules announced:
1. As of November 30th, the government will impose new restrictions on when it will provide insurance to low ratio mortgages.
This rule had the mortgage industry up in arms last week because little consultation was given to industry stakeholders on the implications of these rules prior to announcing them and it will limit the banks completion for these types of mortgages.
Non-bank mortgage lenders often bulk insure low ratio mortgages (mortgages with more than 20% down) and can offer home buyers more options for self employed and rentals. These low ratio mortgages generally have the lowest default rates.
2. All homeowners who sell their primary residence will have an obligation to report the sale to CRA. This is a move to close a loophole in the tax laws that allows non-residents to buy homes in Canada, and then get a tax exemption to avoid paying capital gains when they sell the home by claiming it as a principal residence.
The intention of this rule is to cool the housing market in the Toronto and Vancouver by limiting foreign money into the Canadian real estate market.
For more information on how these new mortgage rules will affect you, contact Jacqueline Jeffries at 780.220.5968 or email info@jacquelinemortgages.com.