**Updated with recent changes in the 2019 Federal Budget**
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.
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.
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 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.
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 homebuyers 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.
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