Why some first-time homebuyers are scared stiff
If you’re looking to buy your first home, you’ve probably heard about the recent changes to mortgage lending rules recently announced by the government. If you’re shopping for an insured mortgage, these changes could affect you significantly. First-time homebuyers who are relying on high-ratio insured mortgages to help finance their purchase have reason to feel the chills. Here’s a look at what’s in store.
Back on Oct. 3, reacting to assorted complaints about the alleged overheating of the Vancouver and Toronto housing markets and the alleged over-extended debt vulnerability of new homeowners, the Trudeau Liberal government announced changes to mortgage lending rules, which Finance Minister Bill Morneau characterized as a way to ensure that “housing markets are stable and function efficiently.” Here’s what the new rules entail:
* Loan size restricted. Mortgage insurance will be restricted to loans with amortization periods of 25 years or less, with a purchase price of $1 million or less, and to borrowers with a minimum credit score of 600.
* Stress test expanded. The rules will require that mortgage lenders “stress test” the ability of borrowers applying for high-ratio insured mortgages (where the borrower puts down 20% or less) to make payments if rates rise.
As of Oct. 17, borrowers looking for either variable or fixed-rate insured mortgages of any term (now including mortgages of five years or more) must be able to meet payments at the Bank of Canada’s Mortgage Qualifying Rate (MQR), currently set at 4.64%. Borrowers with existing insured mortgages or renewing such mortgages are exempt.
In addition, after Nov. 30, low-ratio mortgages insured through so-called “portfolio insurance” must meet the same eligibility criteria as high-ratio insured mortgages.
* Principal residence loophole tightened. The government is also proposing to tighten the capital gains rules for the principal residence exemption. According to a Technical Backgrounder on the proposed measure from the Dept. of Finance, “An individual who was not resident in Canada in the year the individual acquired a residence will not – on a disposition of the property after October 2, 2016 – be able to claim the exemption for that year. This measure ensures that permanent non-residents are not eligible for the exemption on any part of a gain from the disposition of a residence.” The Backgrounder also says that now, “families are able to designate only one property as the family’s principal residence for any given year.”
The government says these changes are designed to ensure that high levels of debt taken on by some borrowers “are sustainable, that lenders are acting prudently, and that financial stability risks do not arise in the event of increases in interest rates or a housing market downturn.”
The main immediate impact will be to reduce the pool of qualifying borrowers in active housing markets like Toronto and Vancouver, thus dampening demand, and making it just a bit more difficult to sell your home. In Vancouver, where foreign purchasers are already subject to a sales tax, sales activity has slowed considerably. Trouble is, outside Toronto and Vancouver, where real estate markets aren’t quite as hot – that’s essentially the rest of Canada – the same rules apply.
The tightening of the principal residence exemption rule will apply the brakes on housing markets even more, as non-resident foreign buyers start to look to countries other than Canada to stash their cash. For home buyers in Toronto and Vancouver, at least, who are not affected by the new stress-test rules, it may eventually mean a less competitive market with more supply and less pressure to “do the deal” in heated bidding wars.
© 2016 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.
