Mortgage Rules for 2021 and How They Affect Home Buyers

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by Enoch Omololu

Updated

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This year has seen Canadian real estate prices go through the roof (pun intended), with price increases of 25% to 30% in many of the top markets.

As a result of this overheating, the Office of the Superintendent of Financial Institutions (OSFI) recently proposed raising the minimum qualifying rate for uninsured mortgages to 5.25%.

This is a significant uptick from the current 4.79% benchmark rate used by the major banks for stress-testing the finances of new home buyers.

What the new rules mean is that buyers who are applying for an uninsured mortgage will need to pass a tougher stress test and show a lender that their income supports a mortgage loan at the offered rate plus 2% or 5.25%, whichever is higher.

Whether this new mortgage rule will help dampen the current frenzy in the real estate markets is unclear. That said, experts are estimating that this move will lower homebuyer’s purchasing power by approximately 4% to 5%.

Other ideas that have been floated for curtailing unsustainable increases in home prices include removing the capital gains exemption from primary residences.

New Mortgage Rules 2021

Below are some other mortgage rules that apply in 2021:

1. Homebuyers will need at least a credit score of 680. This is 80 points up from the previous requirement of 600. If a couple is buying a home, one of the applicants must have a credit score of at least 680.

Don’t know what your credit score is? You can check it here for free.

2. The maximum gross debt ratio (GDS) is limited to 35% (down from 39%) and the maximum total debt service ratio (TDS) is now 42% (down from 44%).

Effectively, you will need to show that a smaller percentage of your income is required to pay off your debts.

3. Borrowed funds will no longer count towards your downpayment or count as equity when considerations are being made for your mortgage default insurance.

While these changes will definitely impact some homebuyers, it is not as bad as it sounds. There were initial fears that the minimum downpayment amount was going to be raised from 5% to 10%.

New Mortgage Rules 2019-2020

The CMHC announced new mortgage rules that took effect on July 1, 2020. These changes tighten CMHC requirements and are aimed at discouraging higher-risk borrowers from taking on a mortgage they can’t afford.

A higher risk borrower is a homebuyer with less than 20% home downpayment.

While these new rules were forecasted to result in house prices declining across the board by 9% to 18%, this did not materialize.

There have been several changes to the mortgage rules in Canada over the last 3 years. The most recent and future changes popped up in the 2019 federal budget i.e. the First Time Home Buyer Incentive which is aimed at helping first-time homebuyers afford a home in Canada’s ‘hot’ real estate market.

This program would be administered via the Canada Mortgage and Housing Corporation (CMHC) and provide up to $1.25 billion to eligible homebuyers over 3 years. Some of the proposed eligibility requirements for the program are:

  • Households with incomes less than $120,000 can qualify to receive a 5-10% incentive (like an interest-free loan) towards their home purchase.
  • Homebuyers must have a minimum downpayment of at least 5% (insured mortgage).
  • The maximum mortgage value plus CMHC loan is capped at around $560,000.

For example, on a $400,000 resale home, after deducting your 5% down payment ($20,000) and 5% incentive ($20,000), your mortgage amount is reduced to $360,000. This could lower your monthly mortgage bill by $120 from $1,971 to $1,851 (using a 3.49% mortgage rate).

If it is a new home that qualifies for the full 10% incentive (i.e. $40,000), your mortgage amount falls to $340,000, potentially saving you $228 per month (mortgage payment falls from $1,971 to $1,743) or $2,736 per year. These can result in significant savings over time.

Homeowners who take advantage of the plan can repay the loan at any time and it does not bear interest. The loan (incentive) must be paid up within 25 years or when the house is sold. The First-Time Home Buyer Incentive Program came into effect on September 2, 2019.

In the 2019 budget, there are also plans to increase the RRSP Home Buyers’ Plan from $25,000 to $35,000. This means that couples will now be able to withdraw up to $70,000 from their RRSP to put towards a home purchase tax-free.

Related: A Complete Guide on How To Buy A Home in Canada

Rule Changes in the Canadian Real Estate Market (2016-2018)

In 2017, the Office of the Superintendent of Financial Institutions (OSFI) introduced new mortgage rules that became effective starting January 1, 2018. The new rules require that uninsured mortgages i.e. mortgages where the home buyer has a down payment of 20% or more, now pass the same “stress-test” required for high-ratio or insured mortgages.

The “stress-test” essentially means that all homebuyers must qualify for mortgage loans at the higher of the Bank of Canada’s five-year benchmark rate (currently 5.14% – April 1, 2018) or the mortgage rate offered by their lender plus 2% points.

A few changes have been effected in the real estate market over the past year, including:

  • A stress test for all insured mortgages where the home buyer has less than 20% down payment, with new buyers having to qualify for mortgage loans at the Bank of Canada’s (BoC) benchmark rate – effective November 2016.
  • Restriction of mortgage insurance to owner-occupied dwellings, shorter maximum amortization period, a purchase price of less than $1 million, and a minimum credit score of 600.
  • A maximum Gross Debt Service ratio of 39% and Total Debt Service ratio of 44% – calculated using the higher stress-test rates.
  • Increase in the mortgage default insurance premium payable on insured mortgages to as high as 4% – effective March 2017.
  • The imposition of a 15% foreign buyers tax in British Columbia (August 2016) and Ontario (April 2017), plus other control measures.
  • A similar stress-test for uninsured mortgages where the buyers have 20% or more of their down payment – starting January 2018.
  • A stress-test will also be conducted when homeowners who are refinancing their mortgage change lenders.
  • Individuals selling real estate in British Columbia are now required to disclose their residency status in Canada for tax purposes. This is to ensure that foreigners or non-tax residents do not avoid paying taxes on capital gains resulting from the sale of property designated as a principal residence – effective November 27, 2017.
  • A new “speculation tax” in B.C. that imposes a 0.5% tax (for 2018) on the assessed value of homes that are owned by non-residents (or vacant) was unveiled in the B.C. Budget announced on February 20, 2018. The tax will increase to 2.0% in 2019.
  • The foreign buyers’ tax of 15% that was introduced in British Columbia in 2016 has now been increased to 20% as of February 21, 2018. The area of coverage for the tax has also been widened to include Metro Vancouver plus the Capital Regional District, Fraser Valley, Central Okanagan, and the Nanaimo Regional Districts.

Drivers of these changes have largely been due to the increasing and unsustainable indebtedness of Canadian households, soaring house prices in Ontario and B.C., and the potential risks posed by these issues to the general economy.

What the “stress-test” accomplishes is that it ensures homeowners can afford to pay their mortgage loans even if rates go up. And, speaking of rates going up, the bank of Canada has already raised its key interest rate twice this year (currently at 1%). More increases are likely as the economy continues to improve, and mortgage rates will definitely follow suit.

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Potential Impact of New Rules

Increased regulation in the housing market often has a predictable outcome, at least in the short term.

Generally, it’s likely we will see the following:

  • Increased demand for homes in November and December 2017 as individuals with pre-approved mortgages rush to close.
  • Increased activity in the cheaper homes category and less activity in pricier categories. New homebuyers will qualify for lower mortgage loans when the new rules come into effect.
  • Some slow-down in the growth rate of house prices (year/year), especially in areas like Toronto and Vancouver.
  • Increased patronage of lenders who are not federally regulated, such as credit unions.

Mortgage Professionals Canada (MPC) released a report on December 5, 2017, estimating that the new stress tests that are coming into effect on January 1, 2018, will very likely have a negative effect on the real estate market. Some of their estimates include:

  • Approximately 18% of annual mortgage borrowers (or 100,000 home buyers) will likely fail the new stress tests.
  • 50,000 to 60,000 potential home buyers per year will likely have to settle for a cheaper house that is not necessarily what they would have otherwise opted for.
  • 40,000 to 50,000 prospective home buyers per year will likely be unable to buy a house at all.
  • Between now and the end of 2019, as many as 200,000 homeowners will fail the stress test at the time of their mortgage renewal, causing them to have to look for less competitive mortgage rates.
  • There will likely be an increase in the number of prospective homebuyers who will turn to credit unions (not federally regulated) and mortgage investment corporations (not provincially or federally regulated).

MPC is Canada’s national mortgage broker industry association and they are definitely fighting for the interest of their group members. Based on some of the stats in the report, some of their estimates are definitely possible. However, no one can say for sure how the real estate market as a whole will react to the new rules.

Mortgage Affordability under the New Rules

An example using Ratehub’s Mortgage Affordability calculator:

Old Rules: Assuming a 20% down payment, 5-year fixed mortgage rates of 2.84%, and a 25-year amortization; a family with an annual income of $100,000 can afford a home worth $693,405.

New Rules: Applying the new “stress-test”, the family must qualify for the mortgage using the greater of 4.89% and 4.84% (calculated as 2% + 2.84%). Therefore, with a 20% down payment, a 5-year fixed rate of 4.89%, and a 25-year amortization, the family can now afford a home worth $591,537.

The difference is that under the new rules, the family’s affordability has dropped by $101,868 (-15%). A bank that was willing to lend them $700,000 before is now only able to loan them approximately $600,000.

Related Posts:

Closing Thoughts

There are going to be different takes on how people see the recent mortgage rules. Many new homebuyers, sellers, and realtors will definitely hate the increased hassle.

In my opinion, it’s a mixed bag – on one hand, it’s better to have a housing market that’s healthy and stable; and on the other hand, many young people and new immigrants may have a tougher time becoming homeowners. Overall, if a slower housing market results, it will benefit new home buyers who qualify.

Like I discussed in my article on home affordability, no matter how much the bank is willing to lend you, ensure you only buy a home you can afford.

Buying a house soon and looking for the lowest mortgage rate possible? check out IntelliMortgage for the best mortgage rates available in your area!

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I like hearing from my readers. If you have any thoughts or questions, please feel free to drop them in the comments section below.

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Author

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Enoch Omololu

Enoch Omololu is a personal finance expert and a veterinarian. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. He also has an MSc. in Agricultural Economics from the University of Manitoba and a Doctor of Veterinary Medicine degree from the University of Ibadan. Enoch has a passion for helping others win with their personal finances and has been writing about money matters for over a decade. His writing has been featured or quoted in The Globe and Mail, Winnipeg Free Press, Wealthsimple, Financial Post, Toronto Star, Credit Canada, MSN Money, National Post, CIBC, and many other personal finance publications.

His top investment tools include Wealthsimple and Questrade. He earns cash back on purchases using KOHO, monitors his credit score for free using Borrowell, and earns interest on savings through EQ Bank.

26 thoughts on “Mortgage Rules for 2021 and How They Affect Home Buyers”

  1. Hi Steve,

    True, not everyone will feel the same way about these new changes. In general though, I feel the government made a good call by stepping in at this point.
    Thanks for stopping by.

  2. In my opinion this is good initiative to keep away the speculators and foreign investors. Canadians at least can afford to buy the houses in Toronto and B.C..

    • Hi Chander,
      I agree, and hope that this action would help to slow down the ridiculous rise in house prices in Toronto and Vancouver.

      Thanks for your comment.

    • Sorry, who can afford to buy 1 M houses? Are your serious, when you say someone can “afford” those? Of you ate taking of people with 300-400k income – sure, but most Canadians are in 70-120k bracket and 500k is already really high for them.

  3. Reducing the amount first time homeowners are able to spend on their first home could mean they no longer are able to find a home. We recently spent a little over 300k on our first home – a new condo in BC lower mainland/Fraser Valley. We were approved at around 340k, but found it very difficult at this amount to find something we wanted.

    “New homebuyers will qualify for less mortgage loans when the new rules come into effect.”

    That’s a pretty painful pill to swallow. I guess I’m glad we were able to buy in and find something we wanted when we did. I hope this ends up resulting in a more stable market, but it’s already very hard for young people to buy in the current climate.

    • Hi Matt,

      Thanks for stopping by! I do agree that it’s a tough pill to swallow for the average Canadian who is in the market to buy a home right now. Fortunately you were able to find something in your price range – I don’t live in BC, but from what I have been hearing, it’s pretty crazy out there!

    • Let’s just hope the market doesn’t crash and you are not left hanging in there. Considering the state of Canadian, US and global economies – I’d say the economy will not get better anymore. It’s a matter of “how fast and how bad it will get”.

  4. Funny to read how this change “will make the market healthy, affordable” and all that. Market is NOT healthy and hasn’t been for a long time, houses are not affordable at all – the prices are way our of reach of many and those who but houses end up spending most of their income paying mortgage back. The government didn’t bother doing anything for well over a decade and now this is pointless. 15/20% task on foreigners is a joke and a slap in the face of Canadians – it should easily be 100% with all of it going to build affordable housing for Canadians. All those clowns who are parking their money here should pay for the privilege. There is nothing that is right about housing market in Canada.

    • Hi Alex,

      Thanks for your comment. When I look at the ridiculous prices of average homes in some areas of Toronto and Vancouver, I often wonder if any government regulation can mitigate the sharp price correction that will need to occur in those areas at some point. Wages are not climbing at any rate to match the rate at which house prices have been soaring for the last decade and the day of reckoning will come when/if hot money from abroad stops pouring in.

      • I honestly was really hoping for the market to crash badly and put all those who are borrowing way too much on the streets. People have to pay for their mistakes and greed and stupidity. However, what we are seeing now is a much larger game player and the housing market was a way too absorb inflation much like in the US. Buy Canada is a small market unlike the US, so one can only wonder what will be happening here. Too bad a crash hasn’t happened a while ago and the bubble was inflated even more. Current prices are unrealistic. And the fact, that calculations show that someone with income of only 100k can “afford” 725k mortgage is pure craziness. I’m way above that pay and there is no way in hell I’d ever consider getting a mortgage that high.

        • I wouldn’t go anywhere near a house that expensive myself either. If things go south, one may be left hanging on to a house one cannot sell without losing a great deal of money! However, its anyone’s guess what will happen in the near-term. I remember waiting for 3 years hoping that prices will moderate, and all it did was go up and up.

        • I really don’t think it will crash. All the major banks are holding the equity of the two most popular markets Vancouver and Toronto. If all the sudden drop in values their bank balance sheets will be in red ink. I don’t think the government will allow to do that. If the financial institutes in trouble so does the Canadian economy. It will gradually slow down in transactions activities and will let the market absorb the corrections eventually. Whoever lost their jobs, divorced, estate planning or retirement will be the one forced to sale and see how motivate these sellers are. I would say many people have already cash in during 2016/2017 including myself. Oh well I only have a few more years of my job then I’ll be moving out of this country. For those of you trying to raise the family here, my suggestion is stay away from Vancouver and Toronto. Both cities are getting worst, i.e. drug overdose, homeless, cost of living, traffic congestion, low funding in education and health care, gangs shooting and guns are everywhere, homicide. The chances are your kids will raise in one of these factors environment. There are many many nice places in Canada to choose and much much more peaceful to live. Why pick Vancouver and Toronto? Think about it have a peace of mind. You’ll be much appreciated for what I just said.

        • Your just saying that because it!s not you or your family. I don’t wish that on anyone and their children to live on the streets due to misfortune of a bad employer and a government unable to run a country and I’m debt free.

  5. Hi Bill,

    I feel your frustration. We can only hope that things work out well. It’s pretty difficult to predict the top in any market, however, if there’s a significant correction in house prices, homeowners who bought at the top of the market may need to hold out for a while or risk losing money if they sell.

  6. The new rules have already bake in for the new real estate prices. Why catching the falling knife when we know the price will continue to fall for the next 5 years or may be 10. There is no rush to push yourself to buy before Jan 1st, 2018. I think the real income will take several years to catch up for the current property price right now sitting 11X. To be more affordable the price has to come down to 7-8X that is 25-30% drop in price. My recommendation is do not buy. Rent is more ideal and more freedom to move around your cash flow. Let all the foreign buyers absorb all the lost or the developers. I see this market is turning, don’t let these people lock you up in a mortgage jail.

    • “…don’t let these people lock you in a mortgage jail.” Haha…That’s an interesting take, Don! With regards to renting vs. buying, that’s a debate that has been around for a while, and it will definitely not go away anytime soon.

      Thanks for leaving your thoughts on this issue.

  7. So this is how this corrupted cycle continue-they knew the entire thing was corrupted so they changed it ….Pretty sure whoever the 1% made enough money out of selling their shit now they ran out of it so they made it difficult for first timers to buy…..who cares after all I made me and my corrupted friends made enough money…???This is the problem with neo-liberals and their friends……….

    why change if not corrupted ?

  8. Let me say this. It is too…. late. Damage has been done. As usual, there was plenty of time to do something about this housing bubble. Of course, nothing was done…. until now.

    History will not be kind to Bank of Canada, our Government policies, greedy housing speculators, and the everyday Joneses. It was all a fantasy, and future will be nothing less then tears.

  9. This new rules and regulations will make middle class to buy smaller house at higher mortgage rate, make banks more profitable in mortgage lending and thus more taxes to the government, that is where 40 billion funding for housing development come from. At the end of day, it is the middle-class who pay for the bills.

    • No matter what happens, the banks will benefit. Mortgage rates increase, but interest rate on our savings account stay the same. The middle class always bear the brunt.

  10. still not helpful. Lowering the prices of the Ontario houses would be a way better Idea.

  11. Thankful for sharing this useful post!

  12. November 22, 2019

    Rules and regulations old and new do not do enough to protect
    the public from the likes of this;

    Since the following activity effects the Real Estate Industry,
    Lawyers and Mortgage Agents as a whole, the undersigned
    would appreciate your thoughts and/or position on the conduct
    of a Mortgage Agent and her Broker/Employer who appear to be
    operating a Bait & Switch Scam and what, if anything, are the
    industry regulators prepared to do to protect the Public and
    legitimate professionals earning a living in this industry.

    Ex-paralegal Turned Mortgage Agent claims to have obtained
    correspondence course law degree ! Correspondence Administrators
    on record the “…degree is not recognized in Canada”…

    This ex-paralegal becomes self styled Lawyer & Mortgage Agent
    Publicly advertising a “BA” and “LLB” after their name (we all
    know that an LLB degree implies lawyer/legal services, reserved
    for those that have been called to the bar).

    For The Record;
    Ontario Attorney General Doug Downey Refuses To Exercise His
    Mandate as “Guardian of the Public Interest” and Prosecute A
    Phony Lawyer…

    Law society is on record stating “no control over conduct” and
    Confirms Not Licensed Lawyer – Lawyer Insurance ? For the
    Record the LSUC was informed this individuals “Conduct”
    over a year & a half ago May 2018.

    Once the LSUC bowed out The Attorney General “Guardian of
    the Public Interest” was approached to do something about
    this individuals “Conduct”. The Attorney General refuses to
    acknowledge responsibility and/or to protect the public
    from a Bait & Switch Scam.

    Local Conservative MPP Stan Cho, staff member says booked
    up no appointments to discuss this matter in foreseeable future
    (translation Scram kid you bother me).

    Be warned this individual and her employer are operating a
    Very Public “Bait & Switch Scam” The Bait is “I’m a lawyer”
    the Switch is “I’m not a lawyer” just sign here..

    When you think you’re getting a legitimate lawyer to assist
    with a Mortgage Transaction… you’re not… !

    The undersigned looks forward to your reply, thank you
    CR Sutherland

  13. Appreciating the tenacity you put into your blog and comprehensive information you provide.

  14. I think one of your ads caused my browser to resize, you may well want to put that on your blacklist.

    • @Cyndy: Thanks for the heads-up. I will try to figure out what happened. If you also know which ad caused your browser to resize, you can report it by clicking on the “report this ad” text at the bottom. Cheers.

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